Oil rises on hopes for a demand boost - Rystad Energy comments

Oil prices rose on Wednesday morning as traders cling to potentially positive indications that the demand-supply gap may somewhat become smaller soon.

Countries around the world are desperate to reopen for business, even hard-hit Italy and the US, signaling intentions to bring their economies back to working mode soon. Such a development could indeed bring some oil demand back, but not that much for the hardest-hit road fuels yet as travel restrictions remain. Again, intentions are not actions yet, but they are enough to get trading going, as market participants do not want to miss the positive sentiment in case these hopes materialize.

On the US front, regulators in Texas will decide next week on cutting some of the state’s production or not.

We believe that the RRC is unlikely to vote in favor of this motion on May 5th as a large majority of influential producers do not support these measures.

Even if they did, the proration order is only to take effect after (and if) other states / countries also cut generous amounts, in addition to the 9.7 million bpd cut of OPEC+. The latter seems also unlikely. Any effect of this order would come too late (earliest in June). By that time, operators would have already cut voluntarily their production.

Indeed there is now sufficient evidence that operators will be cutting production on their own, even without regulatory mandates, by at least 300,000 bpd in 2Q. Moreover natural decline, full activity collapse and the delay of well startups will further contribute to the reduction in output.

Lastly, as we wait to find out last week’s official storage filling rates in the US, an estimate for lower-than-expected build-ups by the API Institute has boosted market confidence that storage is not building as quickly as previously thought.

In Rystad we believe storages will fill pretty quickly to their top within the next 3-4 weeks under the current demand-supply fundamentals. And this estimate is for their 100% nameplate capacity. In reality, some facilities never reach that for technical reasons.

To conclude, there is plenty of information to trade on today and for the next coming days. Overall we need official announcements for cuts or economies reopening for prices to stabilize.

Expect a lot of volatility and price swings either way in coming days as bullish and bearish traders weight their hopes and fears in a market that is desperate to find something to hang on.

Read the latest issue of the OGV Energy magazine HERE.