Oil on the rise as demand starts to come back - Rystad Energy comments

The market is still vulnerable but now one thing is clear, the demand bottom is behind us, and this is manifesting in oil prices which are on the rise.

The existing problems did not magically get resolved, the storage constraint is still there, but a couple of weeks away, so we will see its effect on prices soon, as the market will get tight.

But for traders, first things first, the prices cannot only decline daily, the boost in demand has to be cheered for and the current price rebound is exactly that. Make no mistake, this is how the market works, but lower prices will return, hitting a bottom around mid- to end of May.

Key reason behind the price strengthening is regional traffic data, which indicate the demand bottom is behind us. Lockdowns are slowly easing across most regions and in the US. Crude markets are also getting less off-balance, but we remain cautious that a balance cannot be achieved without quicker shutdown of fields and wells. Several operators, both US shale and offshore, now announce shut-ins, a seemingly bullish development. Note that the US oil production has already declined by  almost 1 million bpd since the peak in March.

However, we yet only observe a fraction of the required shut-ins that are coming during May to avoid critical congestion at storage and shipping terminals.

One exception is Canada where 1 million bpd in actual shut ins have brought WCS up beyond many offshore blends where true spot prices are discounted 5-15 USD below frontend benchmarks.

We remain very cautious short term, but our view is that we will see a price recovery on the longer term. So we are in little doubt that most related markets are close to bottoming now in May, while some "paper markets" have likely passed the bottom already, as the coming price floor in crude markets could be very short-lived and with positive impact on long-term fundamentals.

Think of it this way, if you’re a trader and open the window, do you see traffic? Is it noisy? That’s the indication that demand is coming back, that the price rebound is not too far away. Of course what you can’t see from the window is the storage tanks filling up, but a market can’t only trade in negativity.

Read the latest issue of the OGV Energy magazine HERE.