On Monday (4 May), oil price increased 3 per cent amid more countries announcing they would start loosening lockdown measures and the world’s top oil producing countries and companies cutting their crude supply.
Due to stay-at-home orders, global fuel demand dropped by an estimated 30 per cent last month and weak consumption is expected to linger over the crude market for months. This is despite the output cut by major world oil-producers on 1 May. Even so, quick action by those parties could lower the supply glut more swiftly, analysts said.
“The market continues to price in the idea that things are improving,” noted Gene McGillian, vice-president of market research at Tradition Energy in Stamford, Connecticut.
US West Texas Intermediate (WTI) crude rose by 3.1 per cent (US$0.61 to US$20.39 per barrel) whereas Brent Crude increased by 2.9 per cent (US$0.76 to US$27.20 per barrel).
“We’re supposed to see the production cuts start to show up… the slow restart of not only some of the states here in the US but some of the countries in Europe is beginning to partially alleviate some of the demand fears,” explained Mr McGillian.
Lockdown restrictions have been eased on Monday by a number of governments – including Finland, Italy, and several US States – to revitalise their economies. Nonetheless, with death reaching a quarter million worldwide and cases exceeding 3.5 million, officials warned against acting too hastily.
Oil and gas output in Q2 of 2020 will be reduced to levels not seen in at least 17 years by the world’s top oil companies, known as OPEC+. This is on top of the fresh supply reduction in May by the Organisation of the Petroleum Exporting Countries (OPEC) and its allies.
Due to the partial recovery in oil demand and lower crude production, Goldman Sachs expressed optimism about the rise in oil prices in 2021. Its forecast for 2021 global benchmark Brent was revised from US$52.50 to US$55.63. As for WTI estimate, the bank revised the price from US$48.50 to US$51.38.
The increase in prices is limited by the resumption of trade frictions between the United States and China.
“Demand growth in China is good for the energy market right now, it is pretty much the only game in town,” remarked Bob Yawger, Director of Energy Futures at Mizuho.
“Even a verbal scrap with President Trump is not good for China demand growth, considering the fragile circumstances the market is currently operating under,” he added.
On Sunday (3 May), Secretary of State Mike Pompeo stated that there was “a significant amount of evidence” that COVID-19 originated from a Chinese laboratory. This statement is on top of the threat by the US President Donald Trump last week to impose tariffs on China.
Following US Treasury Secretary Steven’s statement that he expected China to honour its trade agreement with the United States, oil prices have recovered some of their losses. He added that Trump administration was searching for more storage capacity and that he expected oil markets to rebound.