Markets are excited about oil price rally too soon

8 May, 2020

Oil prices rallied for five consecutive days this week amid investor optimism over the relaxing of coronavirus lockdowns in the U.S. and around the world, but several energy analysts argue it’s too soon to get carried away.

The commodity that saw one futures contract go negative for the first time ever last month, over the worst demand destruction in its history, is seeing new life as traders believe the demand trough is behind us.

But analysts stressed that the lack of storage space for crude globally remains a massive problem, and will keep a ceiling on oil prices for the near future — particularly for U.S. benchmark West Texas Intermediate.

“Front-month WTI oil futures will continue to be volatile until the storage problem is resolved and traders are confident that if their position expires they will be able to store oil at a reasonable price,” Nicholas Cawley, market economist at Dailyfx.com, wrote in a note Wednesday.

“With global economic activity unlikely to pick-up in the foreseeable future, demand for oil will remain low and the current imbalance against excessive supply will continue to cap any rally in WTI oil futures.”

International benchmark Brent crude was trading at $31.66 per barrel on Thursday at 8:30 a.m. ET, up 6.5%, while WTI traded up 9.5% at $26.28 per barrel. Both contracts are still very much in correction mode, down more than 50% year-to-date.

Production in the last month has finally begun to respond to the demand drop, with vast capex cuts and production shut-ins contributing to the recent price recovery. Oil output in the U.S. had fallen by 1 million bpd by mid-April from its record high of 13.1 million bpd just one month before.


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