advertisement
Ideas & Debate

Black gold on recovery path to $50 per barrel

crude oil
Crude oil remains caught in the crosswinds of improving economic data and the uncertain path of the virus. 

One number to start your day — 541 million barrels of oil storage in the US for the week ended June 19 is a record. Crude oil inventories were up 26 percent from a recent low in mid-January, thanks to a drop in demand for gasoline, diesel, jet fuel, and other refined products.

US oil output and imports both fell in response to lower demand, but not quickly enough to prevent inventories from rising sharply.

American gasoline consumption has rebounded 70 percent from the lows in early April, although it remains well below normal for this time of the year.

That has helped slow the weekly growth rate of crude inventories but it has not been sufficient to reverse the increase in stored crude oil.

Yet oil prices continue to defy gravity, rebounding after the US Energy Information Administration reported a bigger-than-expected draw in crude oil stockpiles of 7.2 million barrels last week.

advertisement

US West Texas Intermediate (WTI) crude oil futures (August) rose 1.4 percent to $39.82 a barrel. Often, crude oil likes to trade in ranges of $10, currently in the range of $35-40. A weekly close above $40 opens the choppy path to $50.

Recently, oil prices rose above $40 a barrel on demand hopes, with traders hopeful that global fuel demand will rebound more quickly than anticipated, especially with the easing of lockdown measures countries have imposed. US crude futures for delivery in July rose 2.3 percent to $39.75 a barrel, recording for their highest close since early March. Prices started the year above $60, briefly collapsed below $0 for the first time ever in late April due to a global glut of oil and are now rebounding with drivers returning to the road and producers curtailing supply.

Prices recently rallied after the Organisation of the Petroleum Exporting Countries (Opec) reported high compliance with the cartel's production cuts in May. It reiterated that those not fully complying would have to compensate by cutting output more moving forward. Output reductions from Opec allies like Russia and tumbling US shale production have also buoyed crude prices.

The supply cuts are coinciding with a rebound in fuel consumption as the world economy reopens for business.

Data showed an uptick in Chinese economic activity recently, although, China’s — the world’s manufacturing hub — economic recovery faces headwinds despite upbeat data.

The impact of recently reimposed lockdown measures in Beijing and its surrounding regions after a cluster of new Covid-19 infections has not been fully reflected in the latest PMI data, and the tightened social-distancing requirements might curb the pace of recovery in the services sector.

At the same time, governments and central banks around the world are spending to support growth and slashing borrowing costs.

The comeback in demand is a testament to the impact of global economic stimulus and its effectiveness in healing the global economy.

Oil's tepid climb came with global stocks also rising. Recent reports that China plans to increase its purchases of US agricultural products to comply with a trade deal the two countries reached earlier in the year was boosting investor sentiment.

China is the world's largest commodity consumer, and trade tensions between the US and China had caused oil-price volatility in recent years. Many analysts are still worried that a new spike in cases could slow the economic recovery. With crude now climbing back to levels that would make more drilling projects profitable, traders are closely watching to see how quickly companies increase supply.

Some shale producers have pledged to increase output in the coming months. Still, investors think it will take time for that production to return to the market and expect the ultra-low prices from earlier in the year to hamper energy supply chains for months, if not years to come.

Crude oil remains caught in the crosswinds of improving economic data and the uncertain path of the virus. With falling stockpiles as economies reopen creating a lift in economic activity, rising US cases are dampening investors and consumers’ confidence making the outlook appear extraordinarily uncertain.

The Norwegian krone should strengthen in coming months as the country's economy recovers from Covid-19 following a swift response to curb infections.

Norway's short lockdown in many business areas combined with the recovery in oil prices and the huge fiscal and monetary policy support has led to improved economic data and the Norges Bank to upwardly revise its 2020 gross domestic product forecast last month.

Here at Mansa-X, we see a scope for the Norwegian krone to gain against its peers over the next three months or more. We will be looking to buy and hold the Norwegian krone.

Also weakness in the Malaysian ringgit is likely to be limited thanks to a recovery in commodity prices, especially crude oil, which has been buoyed by higher demand and a renewed Opec+ production cut agreement.

Weakness in the ringgit has been driven by poor economic prospects due to the Covid-19 pandemic but we expect the ringgit to average stronger in 2021 as the global economy recovers.

Natural gas prices end higher for a third straight session, closing up 2.5 percent at $1.751/mmBtu, the highest closing price since June 11, as weather forecasts show increasing chances of a July heatwave in key regions that could inject the market with consistent, much-needed demand. Going long on natural gas would be an ideal play as well.

Mr Janot is a Senior Dealer, Mansa X Fund, a product of Standard Investment Bank.

advertisement