Oil prices gain on demand boost, shut-ins - Rystad Energy comments

Oil prices woke up to another good morning on Friday, scoring gains that keep profitability at positive margins for many oil projects that were in stress during the last few weeks.

It’s not by chance that the optimism persists. There are two reasons, both of which are fundamental. Demand is seeing a boost, with already a significant lifting on lockdown measures, and production is being shut-in reducing supply generously.

If you’re thinking OPEC+ cuts, yes they help, but it is the forced output curtailments that many producers are forced to implement that really save the day.

These two forces bridge the gap and May’s demand-supply imbalance is only half the one we had in April.

Something to bear in mind, if you are quick to bless OPEC+ think again: Rystad Energy estimates compliance will be high at about 67%, which will translate into at least 5 million bpd supply relief in May 2020. But shut-in of production across the world is helping out and it is the driving force between the market balancing and the price recovery.

Will the existing cuts be enough now to go through May and June before both demand and supply rebound? We don’t find it likely. The numbers show that the existing shut production can still not cover for the lost demand and that global storages will fill up during the second part of May.

Producers know the way and we believe that more production will be forcefully curtailed despite efforts to find alternative storage, such as hiring tankers.

But now we are not far from the recovery road. There is light in the tunnel’s end and the market sees it. Demand is already greeting from the other side and all producers need to do is drop a few ‘oil supply baggage’ and run to it.

Price-wise, we still expect to see some mild (if not wild) price swings as the traders get bullish on shut-ins and then again bearish on the stock builds that continue to pile up. Think of oil price like a swing, it now moves back and forth as air (stock builds) and gravity (demand recovery) work against each other, but the weather can’t stay windy for ever.

Read the latest issue of the OGV Energy magazine HERE.