The oil market, tired of the negative, focused on expectations of rising demand for raw materials and hopes of lifting quarantine restrictions. Barrel quotes are going up, but excessive optimism, backed up only by theoretical calculations and the so far uncertain restoration of oil consumption in China, can play a cruel joke – any bad news can return prices to their minimum values.
For the first time since the beginning of April, quotations of a barrel began this week with growth, and not with a fall, approaching the mark of $ 35 per barrel of the Brent brand. At the same time, nothing has fundamentally changed in the market, except for the growth of oil demand in China. The volume of oil refining in the PRC last month amounted to 53.85 million tons, which is almost 11% more than in March, and 0.8% higher than last year’s figure for the same period. The problem is that these statistics can be explained not by an increase in consumption, but by the situation that has developed successfully for the Chinese oil refineries, which they used to maximize their capacity with cheap oil.
The weekly statistics on oil reserves in the USA, which for the first time in a long time showed their decrease by 745 thousand barrels, also seriously supported prices. But here the news itself had a greater effect than their actual reduction. In total, over the past 4 weeks, US crude oil inventories have grown by 27.9 million barrels. Behind these figures, several hundred thousand barrels of decline in the last week are simply lost.
A slightly different picture is observed with the number of operating drilling rigs in the USA, reduced to 258 units, the indicator of 2009. These figures indicate a decrease in shale oil production. The catch is that the shale industry is very mobile and quickly responds to any changes in the external environment. The stopped drilling rigs did not disappear, even if they changed their owners, and can resume work at any time.
Excess oil in May in the market is projected at 20-25 million barrels per day. Under the terms of the new OPEC + deal, its participants will reduce production by 9.7 million barrels per day, plus 1.18 million barrels per day of additional reduction by Saudi Arabia, the United Arab Emirates and Kuwait. Another 3-5–5 million barrels per day of production decline are in countries that have not officially joined OPEC +, but which have supported production reduction. A total decline in production, even with the best possible developments, will leave an excess of 5 million barrels per day on the market.
Even the fulfillment of all OPEC + conditions and an additional reduction in production by “sympathetic” countries will leave an excess of oil of 5 million barrels per day on the market
According to Maxim Biryukov, senior analyst at Alfa Capital Asset Management, hopes for a speedy recovery in oil demand are pushing prices higher, but uncertainty remains about the expected dynamics of recovery in the global economy. Despite the weakening of the lockdown, economic activity may remain at relatively low levels for a long time due to lack of consumer demand. The expert emphasized that given the record reserves of the largest oil storage facilities and the number of drifting oil tankers, a new round of price reductions cannot be ruled out.
From the point of view of Oksana Lukicheva, Otkritie Broker, commodity market analyst, the danger of falling prices remains if the economic recovery process reverses or something goes wrong.
Do not forget about geopolitical risks. As the fatigue from the pandemic accumulated and hopes for a return to normal life, the already forgotten US frictions with China and Iran resumed. The development of these conflicts may push barrel quotes to both rise and fall. US President Donald Trump has already called customs duties an important tool in negotiations with Beijing and allowed them to increase for Chinese goods. Last year, the US and China trade wars were the main deterrent to rising oil prices.