After several Covid-19 reopening potholes appeared this week on the road to recovery, triggering a surprisingly down intra-day on Wednesday with broader market weakness offsetting a surprisingly bullish Department of Energy (DoE) inventory data which saw a crude draw suggesting an accelerating pace of US production declines, the near-term outlook for oil is skewing to a more favourable than a negative outlook.
Oil prices have come roaring back after the International Energy Agency’s (IEA) monthly oil market report flags a dramatic supply response from non-OPEC producers, down 1.1 million barrels per day (y/y) in April. The IEA forecasts a 6.7 million barrels per day non-OPEC production drop from March through June, with the US and Canada leading the way.
And coupled with an inarguably bullish weekly inventory report from the US Energy Information Administration yesterday, this is positive for oil.
Evidence of proper compliance within the new agreement is a considerable boost. The stakes are high, so this unprecedented level of non-OPEC + compliance is providing fabulous optics.
The front WTI contract is surging toward $28 per barrel despite expiry approaching and the CFTC issuing a warning to investors that there was a risk that prices could turn negative again. Signalling a significant U-turn in oil prices as the markets are shifting to a bullish bias for near term oil prices as distillate joins the gasoline recovery this week, with demand up +1 MMB/d from the low.
Gasoline demand is recovering in a more V-shaped fashion than macroeconomic data, and with distillate joining the recovery party, it is a massive boost.
The recovery in the distillate market is providing a fantastic springboard for oil prices. Hopefully, this will soon be complemented by an easing in travel restrictions, which should eventually see a pickup in the extremely depressed aviation fuel sector.
US driving behaviour
Apple Maps driving behaviour shows US driving is nearly back to pre-Covid-19 levels and shows a positive divergence over public transport use globally. Together with the surge in China’s first-time car buyer sales, this indicates a definitive trend emerging as consumers prefer the segregated mobility of an automobile to maintain social distance.
There are numerous cognizant risks to this bullish view, none more so that than a secondary global outbreak that could put the world back into another sudden stop.
But the near-term outlook is skewed to a more favourable than a negative outlook. Even more so on the supply side as US production has declined ten times faster than in the 2015-16 episode and US influence may also be a factor in the unexpected deepening of production cuts in Saudi, Kuwait, and United Arab Emirates.
All this taken together as the markets pivot to June, which typically yields US inventory relief as summer driving season in the US begins in earnest will provide excellent eye candy for oil bulls.
Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp