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Oil eases on supply recovery concerns

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Oilfield Technology,

Although at a stable overall level, oil prices fell this morning on concerns over the coming production recovery and if it will again move supply to higher levels than demand justifies.

Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, has commented on the morning's developments:

"Oil prices eased a bit today but that shouldn’t come as a surprise at this stage. One has to see the bigger picture, which is that they have stabilised in the mid-30s range. Deviations to both directions are normal in daily trading and don’t have to necessarily be linked to any major fundamental reason or market event.

At this stage there are two only variables that are able to significantly move prices. Hints on the direction the coming OPEC+ meeting and the consensus that will be reached, and the rate of the shut production’s reactivation. These are essentially the strings that will affect the oil supply.

As for US-China tensions, this is nothing new, there have been in place since some time and they are not really a concern at this stage, at least not in their current form.

The question is more about how long the supply will be left at low levels. Stock builds are falling and the market will be balanced on June, so who wants to willingly forego millions of crude barrels in sales if he’s able to sell it in a recovering market?

The OPEC+ meeting is only 13 days away and we expect a roll-over of the agreement, which will include a tapering of the group’s target cuts from 9.7 to 7.7 million bpd.

The more interesting question is whether Saudi Arabia will continue to withhold 1 million bpd extra from the market in July, as it has pledged to do for June. Such are the real concerns that traders are bothered with today.

More supply, and if it’s more than the demand’s rebound justifies, will mean that prices will be under pressure.

This could have been the reason of the slight price skepticism today, as we now believe some of the shut US oil production of 1.65 million bpd will already start coming back from the third quarter of 2020.

US oil production will likely bottom already during June, which is not what some bullish traders expected just weeks ago. Russia and OPEC+ will need to include these concerns into their calculations during the next 13 days.

Production in the US is, unlike in other crisis in the past, a wild card in today’s market, and the velocity of its recovery will very much determine the direction prices take, especially for WTI which has been the most volatile contract."

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