Oil Prices Surge as Coronavirus Lockdowns Ease

Oil prices soared overnight as some European and Asian countries along with several US states began to ease coronavirus lockdown measures. The rally extended Brent crude's gains to six straight days while US benchmark West Texas Intermediate has rallied for five consecutive sessions. Fuel demand worldwide was down roughly 30% in April, but demand is rising modestly due to efforts to lift travel and production restrictions.

Stocks on Wall Street rallied along with oil prices as investors were encouraged by efforts to reopen economies, as well as by signs from Europe and China that the worst of the coronavirus pandemic may be over in some of the hardest-hit places. Italy, Spain, Nigeria and India together with Ohio and other US states began allowing some people to go back to work and opened up construction sites, parks and libraries.

Oil has gotten a boost from production cuts that analysts say could help bring the market back into balance. OPEC+ producers, including Russia, agreed to trim 9.7 million barrels a day from their oil output, and that agreement went into effect last Friday. Other producers, like Norway, also agreed to cut back. The decision of some countries like India and US to buy oil in their strategic reserves also supported the rebound in oil prices.

US President Donald Trump on Tuesday praised the rise in oil prices and hailed measures by the states to reopen their economies, a reversal from anger he has frequently mooted throughout his administration at price rises as the US shale industry confronts unprecedented pain.

Swiss bank UBS said the easing of restrictions would help lead to a balance in supply and demand for the oil market in the third quarter and even projected an undersupply by the fourth quarter, forecasting an end-2020 recovery of Brent to $43 per barrel and $55 per barrel by mid-2021.

The S&P 500 gained 25.70 points to 2,868.44. The Dow Jones Industrial Average rose 133.33 points or 0.6%, to 23,883.09. The Nasdaq climbed 98.41 points or 1.1%, to 8,809.12. Small stocks in the Russell 2000 index were doing even better than their larger rivals for much of the day before shedding some of their gains by late afternoon. The Russell 2000 rose 7.98 points, or 0.63%, to 1,271.95.

In the US, where the industry is driven by economics and not by agreements like OPEC+, oil production is down at least one million barrels a day from its mid-March high of 13.1 million barrels a day. Analysts expect it could be down another one million barrels or more this month alone after the recent price collapse that took WTI futures to negative levels.

International benchmark Brent crude rose 13.9% to $30.97 a barrel. US West Texas Intermediate (WTI) crude futures gained 20.5%, to close at $24.56 a barrel. After several days of gains, WTI crude oil prices have weakened in early trading on Wednesday as oversupply concerns were back to haunt markets following a greater than expected build-up in US crude inventories, WTI crude oil is trading at around $24.31 per barrel. 

Prices extended their gains in after-hours trading despite industry data showing a larger-than-forecast weekly build in US crude inventories, according to the API report which was released on Tuesday, crude stockpiles in the US rose by 8.4 million barrels over the first week of May. Analysts forecast a build of 7.8 million barrels ahead of the government's report on Wednesday morning.

Accordingly, we are estimating a year-end price of $45-50 for WTI and a year-end US shale production exit of 4-5 million BPD. When combined with the curtailments coming from Saudi Arabia, Russia and other countries we estimate that as much as 20 million bpd will have been removed from the world market. These curtailments put us in rough balance with global demand at 75-80 mm BOPD, and any short-fall from there will quickly put us into deficit.