Marius Paun | London, UK | Senior dealer | Thursday, 14th May 2020
The US oil prices have enjoyed a decent rebound since April 21st gaining 40% in May alone, supported by falling inventories and signs that Saudi Arabia may comply with its pledged production cuts (despite low costs, the kingdom’s budget balances at much higher crude prices). The cut from OPEC+ members which take 9.7 million barrels per day off the market, went into effect on May 1st. Norway and Canada also announced a cut in output. In addition, news that Saudi Arabia raised its official oil selling prices was another welcome booster as it lowers the pressure on what seemed to become an aggressive global pricing practice.
According to the statistics released by the US Department of Energy, oil inventories surprisingly fell by 745,000 barrels last week to 531.5 million barrels. Market participants expected a 4.1 million barrels increase. That marked the first decline in stockpiles following 15 weeks of ongoing additions. At the same time, crude supply at Cushing, Oklahoma storage hub fell by 3 million barrels, the first time since Covid-19 hurt demand in the US. The same report indicated that Cushing hub is now more than 80% full in a sign that producers are still struggling to find storage.
Energy market analysts have stated that the recent crash in oil demand is an indicator that the global economy is heading for a deep recession. Economic data remains rather bleak, but the US stock markets have undoubtedly enjoyed an impressive rebound. A second wave of the coronavirus pandemic once the economies reopen could put renewed downside pressure on oil prices. In that scenario, governments could plan to reintroduce lockdown measures which could send crude prices crashing even further.
Yet, despite the fact that oil prices remain historically depressed, WTI now trades above $26 per barrel after dropping below 0 for a brief period last month. Many places in the US, as well as Europe, have seen the lockdown measures gradually eased which means that oil demand could make a comeback. The American gasoline demand is picking up, especially in the states that have reopened, allowing drivers to hit the road. For example, demand in Texas is now 15% below its usual for this time of the year compared with New York (which has a quarter of all US Covid-19 cases) down 35%. Indeed things are far from normal with overall gasoline demand still 30% down – 3 million barrels below 9.5 million barrels a day for this time a year but that’s better than 47% demand destruction on Easter weekend.
The old saying ‘the cure for low prices is low prices’ may play its role here. In the wake of negative oil prices last month, global supply has been shrinking at an alarmingly fast pace. During the first week of May, it’s been reported that US oil and gas companies have closed near 400 platforms fuelling speculation that rebalancing could be underway.
The question going forward is; was the recent rally overdone? The oil supply narrative remains uncertain, storage continues to fill and the demand may take a long time to recover in any meaningful size. And don’t even start thinking about the renewed tensions between the US and China on any of the issues they disagree on!
Following demand as well as supply destruction in the oil market, we saw an unprecedented event unfolding. At the end of April this year, Royal Dutch Shell has cut its dividend by over 60%. The oil major which has been one of the most reliable dividend payers in the UK, top of the list for income investors, was forced to slash its quarterly payout from $0.47 to $0.16 per share.
The chart above is the spot US oil price, based on July futures, which did not go negative in April. It shows the short-term moving averages now pointing upwards and crossed above the longer-term moving averages, both bullish signals.
On the upside, bulls would need to see a close above resistance at $26.9 first. That would bring into focus the 38.2 % Fibonacci retracement at $29.5 followed by 31.56 the high of April the 9th. We would draw attention on the gap of the 9th of March when US crude prices jumped from $41.08 the low of the previous session to reopened at $32.72 on the next one. Sooner or later gaps like that are filled.
On the downside, bears will have their eyes set on breaching good support just below $24.00 mark. They tried a few times in the past two weeks but to no avail. A close below that level could attract additional sellers who will challenge $22.00 and $20.9 which matched the 23.6% Fibonacci retracement. Ultimately, they will want to retest the low of $7.24 reached on April 21st.