Oil: Positivity for oil prices as evidence emerges of automobile use returning to pre-Covid-19 state

Scraping the Barrel

Asia Oil: Real-time analytics queries are providing empirical evidence that automobile use is quickly returning to a state of pre-Covid-19 normalcy, which is unequivocally positive for oil prices

It was another great week of gains for oil, although the sharp rally was temporarily interrupted ahead of the US and UK long weekend as traders reflected on China news flow. The National People's Congress announced economic measures were interpreted less dovish than expected, and proposed security legislation for Hong Kong weighed on sentiment. 

Less policy stimulus equates to less infrastructure spending, which is terrible for the commodity market in general, while the HK security legislation packs on a hefty amount of trade war risk premium that’s also slightly negative for oil.

The total size of the announced stimulus package is about 3.5% of GDP, falling short of the market expectation of 5-6% of GDP The congress also outlined a smaller than expected fiscal stimulus. But in its place is a binding employment target to keep urban surveyed unemployment at "around 6%". Since consumers are expected to carry the bulk of the heavy lifting, job security will be one of the keys to their spending habits. This offers up a massive dose of comfort to mainland consumers and is favorable for growth assets.

The trade war impact on oil markets depends mostly on whether investors expect US import tariffs on a broader range of goods or higher trade taxes on existing ones. With corporate America already straining under the weight of a collapse in demand, the markets still view a new wave of tariffs as a less likely scenario. The market seems satisfied after a committment to that obligation at the highest levels of the political rung during the NPC.

But decisive for oil was the fact we had the second week of crude draws, both on total stocks and at Cushing and both exceptionally large – 5mbls and 5.5mbls, respectively. The rebalancing is taking place at a faster pace than expected. More significant than expected production cuts in the US plus increased demand from China and OPEC+ compliance have helped to quicken the process. If we get another draw this week, and if the gasoline inventory ebbs, it should set up for another leg higher into June, which is a month that typically yields inventory relief.

And with oil market sentiment mapping to reopening optimism and more quantifiably to mobility data as it pertains to traffic congestions, oil prices recovered in the New York session filling the China headline gap into the NYMEX close on Friday. Traffic congestion real-time analytics queries are providing empirical evidence that automobile use has quickly returned to a state of pre-Covid-19 normalcy as economies reopen, which is unequivocally positive for oil prices

The balance has shifted from both demand and supply sides, with demand rebounding more quickly than expected. Naturally, China has had a long head start in reopening the economy. But even India and the US, where lockdowns began much later and reopening progress is further behind, are showing improvement. While governments will need to calibrate reopening against the risk of a relapse in virus case counts, the initial phase of policy loosening may yield further demand upside for oil.

Although the curve for both WTI and Brent remains in contango, cash prices for immediate delivery are still trading higher than their respective benchmarks.