Now that Oil is back

“Oil (Energy) is back!!!”. These were the words of Donald Trump, who appears desperate for the United States’ energy industry to jump-start after being hit by one of the worst pandemics in history. His reaction to the oil price rally would have been similarly expressed by other World leaders, whose economies rely on the black gold for a fair portion of revenue. The rally would buoy countries such as Nigeria that has suffered from the oil price crash witnessed in the previous month. It would be a disservice not to apportion credit to Trump after he tactfully negotiated one of the most important diplomatic deals with Saudi and Russia to head back to the OPEC+ cuts discussion table. Little wonder what Oil prices would be without his intervention and the consequent OPEC+ cuts.

Brent Oil traded at the $34-$35 range at the early hours of the Asian Session on Wednesday as traders weighed on output cuts agreed by OPEC+ and their implementation, decline in U.S. production and a recovery in demand in China and India. Last week, Mohammed Barkindo, OPEC Secretary-General, commended on the compliance levels by participating countries while he was interviewed by Bloomberg last week. His claims were further corroborated by the Head of Commodities Research at Citigroup Inc. Ed Morse said, “The actual production cuts are deeper and more spectacular than any reasonable person would have thought a week ago.”

Another factor that gave the bulls momentum were indications of oil demand back to pre-pandemic levels in China. In a report by Bloomberg, insider knowledge monitoring the country’s consumption claimed that almost 13 million barrels a day is being consumed, which is not far off May and December 2019 levels of 13.4 million barrels and 13.7 million barrels respectively. The report also affirms that the only thing pegging back the numbers going higher is the dearth of demand for jet-fuel. The dossier reveals that traffic congestion levels are increasing due to commuters preferring private vehicles than public buses for social distancing reasons.

In other bullish news, the American Petroleum Institute (API) on Tuesday surprised speculators and analysts with an estimated decline of 4.8 million barrels in U.S. crude supplies for the week ended May 15. This improved prices as a decline in supply provided support for higher oil prices.

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While most analysts believe the worst for Oil is over, some energy research companies believe the euphoria over higher prices might be short-lived. Rystad Energy cautioned that despite the lifting of lockdowns, there is nothing to indicate that the pandemic would be over soon, or that oil producers will consistently comply with shut-ins. “There is significant downside risk related to two events, the resurgence in COVID-19 outbreaks, and deteriorating compliance to OPEC+ cuts as demand comes back”. Economic outlooks for most countries still look bleak, as acknowledged by Federal Reserve Chairman Jerome Powell that it may take till the end of 2021 and a Covid-19 vaccine for the U.S. economy to recover. The U.K. economy seems to be staring at a “significant recession”  according to fears from Rishi Sunak, the nation’s chancellor.

The chart above shows the current oil price level and how far prices have recovered and how far it must go to reach pre-pandemic levels. Is this rally sustainable? Will a second wave of the virus affect the momentum? These are the questions we begin to ask for Oil dependent countries and companies that need high prices to augment their economic fortunes. The Oil bulls have everything working in their favor in the short term. Higher oil prices have a checklist featuring a revival in demand from China, accompanied by production shut-ins, supply declines, and ease in lockdowns in most countries with previous concerns about storage facilities evaporating.

For now, it is safe to say Oil s Back…and so am I.

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