Oil Explodes Above $40, Finally Out of the Bear Market?

Crude oil prices have been on the front foot the past two days, with WTI moving as high as the $40/bbl level this morning from yesterday’s lows around $37/bbl. Why?

We can contribute this towards three core reasons:

1) OPEC members met yesterday to discuss compliance with the current deal, where Iraq and Kazakhstan submitted proposals to make compensation for their overproduction in May. (Lower supply is good for Oil). 

OPEC has now cut a record 9.7 million barrels of Oil per day, representing 10% of global supply, since May. The pledge to comply better with Oil cuts from Iraq and Kazakhstan has provided assurance in the market that oil supply is still under control. The OPEC meeting has helped renew much-needed confidence.

Brent has also moved into backwardation, indicating a further sign of market recovery. Backwardation is where the immediate delivery of Oil cis sold at a premium compared to obtaining oil supplies at a later date. This encourages Oil out of storage.

2) Saudi Aramco’s CEO yesterday said he sees signs of oil recovery in H2 and that the worst is definitely behind us, increasing optimism for higher sustained prices.

However, OPEC has warned the market would remain in surplus in the second half despite demand improving.

3) Risk appetite this morning took a turn for the better after China indicated that it would accelerate purchases of US agricultural goods, giving a boost to risk assets like Oil. China and the US have previously spooked markets as US trade representatives accused China of not abiding by their commitment to purchase $200bn worth more of US goods, as part of the US-China phase one trade deal.



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