Rows of crude storage tanks in Cushing Oklahoma (U.S) February 2020
A month ago today, crude oil was likened to industrial waste in some parts of the world, something you had to pay people to take away. Now the prices are clawing their way back, up as much as 70% in New York since the start of May.
The fightback, which has been a welcome relief to Saudi Arabia and Russia and even to the White House, came about much quicker than most people expected but getting to where we are today wasn’t easy. Painful but necessary OPEC production cuts and the world’s cautious first steps out of coronavirus lockdown have lifted the market out of the myre of negative prices, but either of them could falter.
“I think the worst is behind,” said Pierre Andurand, chief investment officer and founder of Andurand Capital Management LLP. “OPEC cut enough, and demand will slowly, gradually recover.”
The April drop into negative territory was the biggest seen in recent History
Let’s go back to April 20, when panicked sellers drove the price of the U.S. crude benchmark below zero for the first time in its history. In possibly the most extraordinary 20-minute spans in the history of financial markets, West Texas Intermediate plunged as low as minus $40.32 a barrel, shocking everyone from veteran brokers to retail investors.
A few important things have changed since then.
To start with the flood of unwanted crude has eased off, Saudi Arabia and Russia have agreed on a truce to end their price war and cease flooding the market with record production. Instead, The oil giants led their allies in the OPEC alliance to make their deepest and quickest output cuts on the record.
It’s expected a possible 17 million barrels of a day of crude will have been taken off the market by next month, that coupled with the fact the 30% drop in demand for oil now appears to be easing off as countries slowly kick back into life after COVID, with flights on the rise and drivers around the world slowly begin taking back the roads.
On Tuesday the WTI contract for June delivery settled at $32.50 a barrel, a little higher than the price for July. That’s a good clear sign that holders of the expiring front-month contract weren’t worried about getting lumberd with unwanted barrels.
It’s clear the market still faces considerable risks.
The reopening of battered economies across Asia, Europe, and the Americas will be difficult, and the second wave of Covid-19 infections could throw a huge spanner in the works causing huge setbacks.
Also the enthusiasm for cutting production shown by U.S. shale companies or OPEC could weaken.
At Least, for now, there’s some relief that normal service has returned to the oil market. While a crude price in the $30s is still too low to balance the budgets of most OPEC states, ministers from Saudi Arabia to Russia appear satisfied with the fruits of their labor.
Even major energy importers show little desire to return to those few days when producers had to pay consumers to take their crude.
But we must bear in mind that once economies do start to grow again that OPEC can maintain a healthy alliance and not undo all the hard work of the last few weeks.
