Last week’s momentum that was driven primarily by supply-side has carried through to the early part of this week after the US rig counts fell again.

US curtailments will continue to make up a large part of the supply-side equation. US onshore production has now given up two full years of gains.

It supports the market supposition that even with a rebound in price, the capital investment that had already been tapering off in Q1 isn’t flowing back quickly, suggesting that the US industry will be in for a more subdued production recovery.

Although the US curtailments were not mandated by the federal government or via The Texas Railroad, the sharp drop in US production lends more credibility than anyone might have expected that the US would make up for Mexico’s reduced commitment under the April OPEC+ deal.

The Russian oil ministry will be delighted by this fact and should stave off the threat of OPEC+ disunity for now.

In addition, traders have been scurrying to price in the principle of compensation. These makeup volumes were not expected and certainly not in the price until the JMMC meeting concluded last week where several OPEC + compliance laggards agreed to bring production down and into line with commitments, making up for May over-production, which would be a positive surprise for the markets.

Still, if the process forces compliance, then that, in of itself, would be supportive in the supply data. With both Saudi Arabia and Russia putting up a unified front, the principle of compensation takes OPEC+ commitments to a whole new level of compliance.

Last week’s reports of two major independent trading houses suggesting demand is picking faster than expected continue to resonate. Order flows during peak global trading hours for WTI around 9 AM and between 11 AM and 2 PM EST are unambiguously skewed to the top where bids are outnumbering the offers by a considerable margin.

And at the same time, the Brent prompt spread remains in backwardation for a third day, with forwarding prices below spot until the December 2020 contact, indicating a perception that supply is tight at the moment.

But importantly, the futures market is supported by robust physical demand and just not speculation.

For now, news of new Covid-19 hot spots seems not to have much of an impact on oil. Still, the markets will remain nervous and sensitive to bad news. So, take heed as sentiment could quickly reverse on a dime after the extended rally in oil, but mainly if we see evidence of shut-in global non-OPEC production returning as a result of higher oil prices.

And to reiterate what I believe is the principal channel to appraise the unavoidable spikes in Covid-19 as the world emerges from lockdown. What is essential in the resurgence narrative is whether governments reimpose wide-sweeping lockdowns. With the overall count low globally, that’s unlikely, whereas proximity or soft lockdowns like in Beijing are likely.

In a possible sign that crude is closing in on key inflexion points and that prices may try to consolidate at current levels, The COT data from the CFTC for the week to 16 June showed money managers cut their combined futures and options long position in WTI by 23,948 to 377,173 contracts.

However, and despite the resurgence of Covid-19, oil market fundamentals continue to favour the bulls for now.

Oil markets analysis and insights from Stephen Innes, Chief Global Market Strategist at AxiCorp