Oil swings to gains after morning of stocks build concerns

"After a short decline earlier this morning prices returned to gains. The decline was no big surprise and a result of trader concern that crude stocks will rise again in the US, after the API institute released its weekly projection.

Initially such news could be interpreted as if demand was miscalculated by everyone in the market and oil consumption has not recovered as much as expected. However the market quickly realised that a stocks rise can also be a positive indicator.

Why? Because it can mean that some of the shut production in the US has been reactivated and some of the crude that was stored at sea has now been transferred to land, with vessels going back to their original use, which is to transport rather than store.

Also, a trusted source, the IEA has released projections that point to a higher-than-expected demand for the year, which would of course mean an accelerated market recovery.

Yet, enthusiasm should be balanced with realism. And in reality, with Covid-19-infections increasing in both East Asia and the Americas, a possibility of a second wave of the pandemic is not to be ignored. The market appears to know it, as the price gains have decelerated after a fierce rally two weeks ago. Like we have earlier said, having prices around the US$40 mark, with marginal moves to either direction should be expected for the rest of June. A daily decline or rise, if marginal, does not mean much now and it’s just a result of market forces trying to sell fear and buy enthusiasm. But we don’t expect it to be anything else than a gentle constant bounce.

Something to keep an eye on: US imports and OPEC cut compliance. We see US weekly crude imports retreating from the historic highs reached during the two previous weeks despite Saudi volumes remaining at multi-year highs. Transfers into the Strategic Petroleum Reserve (SPR) also kept storage builds in check. So far, the DOE has received 73% of the 23 million barrels of leased storage, with the rest set to be transferred before by the end of June 2020. Then add a flavour of Iraqi sub-compliance to OPEC cuts into the soup, you have a perfect potpourri of unknown variables. Iraqi exports have been observed lower during the first half of June, but reassurances are made from the Iraqi government that all of the 1 061 000 barrels per day of cuts will be delivered by end-July. We remain skeptical to Iraq actually achieving this acrobatic feat.

But like in real life, traders cannot expect to have full knowledge of every variable in the market and some ‘foggy’ days can be expected ahead, along with the sunny ones."

Read the article online at: https://www.oilfieldtechnology.com/special-reports/17062020/oil-swings-to-gains-after-morning-of-stocks-build-concerns/