Oil Steady on Signs of Firmer Demand Offset by Slow Economic Recovery

Oil prices were little up on Wednesday as concerns over the lasting economic fallout from the coronavirus pandemic outweighed signs of improving demand and production cuts by major oil producers. Brent crude futures for July delivery were trading up 12 cents, or 0.35%, at $34.77 per barrel in the early morning.

US West Texas Intermediate (WTI) crude futures for July were up just 2 cents, or 0.06%, at $31.98 per barrel. The July contract became the front-month after WTI futures for June expired on Tuesday, avoiding the chaos of last month's May expiry when prices slid into negative territory.

Aramco’s stock gained 3.09% on Tuesday in Riyadh. Saudi Aramco reported this month a net income of US$16.66 billion for the first quarter of 2020, down from net earnings of US$22.2 billion for Q1 2019.

Oil prices have posted significant gains with both benchmarks climbing to above $30 for the first time in more than a month on Monday supported by massive output cuts by major oil producers and signs of improving demand.

Assurances by leading oil producers for more production curbs even as some countries are getting ready to reopen their economies had helped boost crude oil prices over the past few weeks, sending US oil over $30 per barrel. However, a bleak economic outlook from the US Federal Reserve put downward pressure on oil prices. US Federal Reserve Chair Jerome Powell said on Tuesday layoffs by state and local governments will slow the US economic recovery while Boston Federal Reserve Bank President Eric Rosengren said the US unemployment rate is likely to stay at double-digit levels by year-end. Oil markets are facing downward pressure after the Fed recently signalled that economic recovery in the aftermath of the pandemic could take much longer than previously anticipated.

Still, the oil market is in much better shape than it was in April output cuts have kicked in and pockets of demand have emerged. There was no repeat of last month’s plunge below zero when the West Texas Intermediate contract rolled over, with the June futures trading at a premium to July before they expired, suggesting concerns the US would run out of storage have eased. International Energy Agency (IEA) forecast the world reserves will decrease by 5.5 bpd by the end of 2020. The global supply of oil will decline by 12 million bpd in May, according to IEA estimates.

Consumption has rebounded to about 13 million barrels per day, according to Bloomberg, citing Chinese energy officials who weren't authorized to speak publicly on the matter. That isn't far off the 13.4 million barrels consumed in May and the 13.7 million in December. The overall demand for 2020 could fall by 8.6 million bpd, the EIA reports. It is far better than previously expected 9.3 million bpd.

But of greater long-term importance for the health of the oil market over the rest of 2020 will be whether the rebound continues as lockdowns ease and the world attempts to get back to a semblance of normality.

WTI crude oil is expected to trade at 30.73 USD/BBL by the end of this quarter. For the long-duration forecast, we estimate it to trade at 26.43 in 12 months. Brent crude oil is expected to trade at 33.20 USD/BBL by the end of this quarter, we estimate it to trade at 28.73 in 12 months.

By the end of this quarter Natural gas is expected to trade at 1.68 USD/MMBtu.  we estimate it to trade at 1.41 in 12 months. While traders are probably correct to start pricing in a longer-term recovery, it is going to be stuttering, uneven move back towards normality.