Oil back to gains on road fuels and OPEC+ meeting

"Even though the morning started on a low note, oil prices regained their ground and now swung to gains. Traders are divided between two indicators today, crude stocks building in the US – a bearish one – and the rise in demand for road fuels, an optimistic one.

When gasoline and diesel stocks fall, that can be interpreted as an indicator of normality, after Covid-19 effectively shut travel and minimised even within-country transport.

Positive road fuel indicators were also joined by enthusiasm over an OPEC+ meeting today. Historically prices almost always react positively on anticipation of such meetings and in the last few months trust has been built that the alliance will keep on taking action to maintain the profitability of oil.

The meeting of course can also go sideways. Members that are not fully complying with their production cut quota are always a sticky point for the big guns of the alliance. Also, some members may argue that taken the road fuel and IEA demand signals, it may be time to bring back some production.

But there are some more clouds on the horizon.

If US exports remain depressed and refineries decide it is too risky to massively scale up utilisation, we can expect more crude builds, and thus, downward price pressure. Fresh US sanctions against China, announced Wednesday, also renew fears on an escalating trade war between the world’s two largest economies, and will weigh on oil prices, if not today, then in anticipation to China’s response.

Globally, in June, we see total liquids demand increasing 6% m/m, but the big question mark is whether this steep slope can be sustained – closures of schools in Beijing and a surge of cases from Brazil to Turkey warrant a dosage of fear over a second-wave of the virus – and potentially more lockdowns. Crude and condensate demand is faring better than oil products as a whole. Thanks to the hefty OPEC+ cuts and compliance, the crude and condensate supply/demand will come to a near-perfect balance in June 2020 and then, barring any tectonic macro shifts like a second-wave or re-lockdowns, see a supply deficit.

As long as oil prices remain in the US$40-sweet spot (low enough to keep marginal supply off the market but high enough to make OPEC+ cuts worth it), we can expect continued crude stock draws in 2H20. But 2020 has been anything but normal, and we believe most of the supply levers (more than 12 million bpd off the market since March) have been pulled, so we are back to a fully demand-driven market."

Read the article online at: https://www.oilfieldtechnology.com/special-reports/18062020/oil-back-to-gains-on-road-fuels-and-opec-meeting/