Oil prices rise on US and Norway developments - Rystad Energy comments

Developments in the US continue to drive global prices this week, as the country is a key demand market and also a major supplier. With most of the world’s available storage also located there, more positive than thought updates are offering a reasonable boost to prices on Thursday morning.

The market today is supported by an implied demand boost in the US and by news that, for another consecutive week, crude stocks built less than most expected.

Yesterday’s US weekly stocks report was interpreted positively, as the implied gasoline demand rose 500,000 bpd week-on-week and gasoline stocks drew, suggesting the slump in demand could be turning a corner.

Additionally, we avoided reaching a new all-time-high US crude inventory situation, as crude stocks built “only” by 8.9 million barrels. This is lower than everybody expected but still a big build versus normal times-

Although the stocks build was lower than expected and helped prices, it is a reminder that crude stocks in the US will continue to build in coming weeks with a very real risk that we will reach practical tank-tops already during May. As storage fills up,  producers will be forced to act with additional production shut-ins and lower prices can be expected.

If the already-stretched storage capacity is getting fuller and fuller every week, a rise in prices cannot be sustainable for long as the problem is not really resolved, just postponed.

At around 80-90% full, traders keep on seeing the storage glass as half empty when it is not even half full. It’s close to overflowing. Even at a lower speed.

Outside the US, the news that Norway decided to “join OPEC+” yesterday evening, also was a confidence -not really a material- boost to the market.

Norway announced a small cut of 250,000 bpd cut for June and 134,000 bpd for 2H20  through revised production permits for relevant oil fields.

Gas and condensate fields are exempt. In addition, several oil fields where operators expected start-up of production in 2020 will be delayed until 2021.

This is a reasonable decision by Norway to protect its interests by following up the G20 accord and issuing mandatory production cuts, the first since 2002.

These cuts are inevitable in any case as Norway has only 20 days production coverage for storing capacity of 40 million barrels, and most likely the filling grade is already very high for most fields as for onshore caverns at Sture and Mongstad terminals.

Unfortunately for the market, cuts are too small to make any practical difference for the global oil market in 2Q with a 20 million bpd implied oversupply, but on the margin could help the oil price recovery in 2H 2020 and 2021.

However, It could also be a good example for other producers outside OPEC+ and definitely an indication that countries outside the group start realizing the gravity of the supply-demand imbalance and act on it.

It remains to be seen if others will join the trend. If more countries curtail their supply, then we really can start talking about a possible resolution to the crisis and may see prices rising back to healthier levels.