Crude Oil Prices Still Surging Amid Bullish Fundamentals
Crude oil markets continue to stride higher, with WTI today moving above the $34 mark for the first time since early May amid a marked improvement in the fundamental outlook for the black gold.
Why are the fundamentals so bullish?
1) Supply is shrinking - OPEC+ axed 9.7mln BPD from global oil production as part of their recent deal, which is now expected to last until the end of the year rather than expiring at the end of Q3. On top of that, OPEC members Saudi Arabia, Kuwait and the UAE have taken another 1.2mln BPD offline in voluntary cuts. The combined output cuts in the US and Canada (a mixture of regulator output restrictions and producers halting output due to low prices) has taken another 4mln BPD. Other major producers such as Norway have also axed production. The general trend in global production has been one of decline in recent weeks.
2) All the while, demand is increasing - Covid-19 spread rate curves have stabilised and headed lower across most of the globe (with the exception of South America), meaning lockdowns have been gradually eased. Lockdowns being eased means the resumption of economic activity, which means higher fuel consumption. Traffic data certainly shows a tick up in travel by car. We have also seen an increase in air travel recently (albeit much more modest). When air travel really begins picking up again over the coming months, this will be another source of increased demand.
Perfect storm for crude?
Decreasing supply coupled with increasing demand makes for a perfect storm for crude prices to gain ground. Citi Bank forecasts Brent prices to average $39/bbl in Q2 this year (they are currently around $37) and $48/bbl in Q4, during which time they expect the oil market to move into a deficit (i.e. more consumption than production) from June through Q3 2020.
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