Outside of a price hiccup at the US market open, oil prices have moved higher in a straight line since London walked in yesterday.
In general, most cross-asset traders remain very bullish on oil. And the oil perma bulls continue to buy the dips as their optimism stems from the fact that global demand is unambiguously on the rise and it's only a matter of time before onshore and floating storage inventories show a leveling off, with the former possibly in the draw zone this week.
Unconditionally supporting that cheery view, the cyclical data globally continues to point to a robust reopening narrative and remains one of the primary bullish price tenets beyond OPEC+’s unwavering compliance. This suggests that oil prices are supported by real demand, not just OPEC + production cuts and the compensation principle, in turn implying both supply and demand curves will continue to move in opposite but bullish directions. But ultimately it will be the global demand for all oil products that will do the heavy lifting from here on.
Sure enough, data from the US overnight supported that bullish reopening narrative after the US pending home sales for May rose a whopping 44.3% month-on-month, compared to the expected 19.3% increase. That was a historical high for the month-on-month gain and, more importantly, – and astonishingly – it exceeds all forecasts by a country mile.
Outside of the three US hotspot states, the epi curves remain relatively stable globally (again, outside of a few hot spots). Still, it seems unavoidable that we’ll continue to see isolated virus outbreaks as the world reintegrates and people will need to do a better job at social distancing to avoid catching the flu. So, barring a full-blown resurgence., it seems highly unlikely that aggressive lockdown measures will be re-imposed globally, which would leave the gradual recovery of demand intact.
A possible price capper over the near term is that a large portion of the market continues to express concerns about the bearish implications higher oil prices will have on US production. Most analysts expect that within the next few weeks we’ll see evidence of US onshore production coming back online. Whether this represents a speed bump for oil or a more meaningful negative catalyst will depend on the magnitude and sustainability of the increase and broader market sentiment.
Speaking of speed bumps, it’ll be interesting to see how US consumers respond to arguably one of the peak driving weekends of the year as the 4th of July draws near. But what could be supportive for oil prices is if US consumers stick loyally by their summer vacation tendencies, cars will be the safest from a virus standpoint, therefore the preferred transportation method.
One weekend won’t make or break oil prices as the market shifts into a multi-year economic recovery, but it could provide the proverbial short-term bump in the road if people decide to stay at home en masse.
There remains much conjecture around US oil response sensitivity as a result of the Dallas Fed survey of oil producers which put the price response to US oil production between USD 36-41/bbl. Considering that oil spent a large part of June in that range, it suggests US oil is much less responsive to rising prices at current levels than expected and may point to a production "tune up zone" closer to WTI $45-50, a price range that would envelope 80% of the survey participants. But that’s still considerably less bullish than ex-BP CEO Bob Dudley's assessment that "oil must be sustained at USD 60/bbl for US output to rise."
In other industry doomy-but-positive-for-oil-prices news, Chesapeake Energy's voluntary bankruptcy announcement cast a pale shadow over US in-shore oil production and, by extension, the industry’s ability to recover from the Covid-19 oil price beatdown.
A counterintuitive view
Given that the market has moved out of backwardation, OPEC may extend the compliance date.
An extension is always possible; on the current run path, OPEC+ production will rise by +2 million barrels per day in August. There have been informally discussed backwardation targets among OPEC+ policymakers which are not yet in play, but if they were made actionable it would justify an extension and could introduce a bad-news-is-good-news dynamic; in the event of lousy fundamental data, it would signal better OPEC+ discipline.
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