Oil Rally Sparks Concern US Production Returning Too Fast



Oil Rally Sparks Concern US Production Returning Too Fast
Fears of a second wave of the virus, combined with record-high stockpiles in the US, are limiting the rally.

(Bloomberg) -- Oil continued its comeback, buoyed by signs of increasing demand as cities emerge from lockdown. But fears of a second wave of the virus, combined with record-high stockpiles in the U.S., are limiting the rally.

Top trading houses Vitol SA and Trafigura Group said global oil demand is recovering rapidly from its historic nadir. They cautioned, however, that a renewed outbreak of the coronavirus is clouding the long-term outlook. In the U.S., consumption is improving, but rising cases of Covid-19 in Texas and elsewhere has raised the possibility of lockdowns resuming. And a stubborn supply glut has further capped gains, with higher prices prompting some shale producers to restart wells just weeks after shutting them.

To sustain the rebound, shale companies should avoid investing in new drilling, said Stewart Glickman, an energy analyst at CFRA Research. “That will help on the supply side from the U.S.,” he said. “The best way to get out of this is to be more disciplined and wait for prices to go back above $50 and stay higher.”

West Texas Intermediate crude has failed to close above $40 since early March. Despite staging a remarkable recovery from its crash into negative territory, the U.S. benchmark is still down 36% this year.

Meanwhile, American crude inventories rose last week to another record high. Oklahoma City-based Continental Resources Inc., chaired by billionaire Harold Hamm, said Thursday it will start bringing back some of its shut-in oil production in July but will keep about 50% of output curtailed.

While physical markets in Europe are strengthening -- with Brent futures for August settling above the September contract for the first time since March, a sign of tightening supplies -- the U.S. benchmark’s structure hasn’t turned as bullish.

Prices:

  • West Texas Intermediate for July rose 88 cents to settle at $38.84 a barrel in New York
  • Brent for August gained 80 cents to settle at $41.51 a barrel

A slow resumption of flights will constrain jet-fuel consumption, and high unemployment will restrict gasoline use, the Organization of Petroleum Exporting Countries said Wednesday in its monthly report.

OPEC+ held an online meeting on Thursday finalizing an accord reached in principle earlier this month. Habitual quota cheat, Iraq, said it will implement its oil-production cuts in full this month and agreed on the details of how to compensate for falling short of its target in May.

Other oil-market news:

  • After piling into oil like never before, retail investors are starting to pull back. Traders on Wednesday pulled $205 million from 12 of the world’s most-watched exchange-traded funds that bet on the price of oil increasing, according to Bloomberg calculations.
  • Saudi Aramco’s head said that the worst of demand destruction is over.
  • The amount of vehicles on Beijing roads has fallen sharply this week as authorities attempt to quell a new coronavirus outbreak, highlighting the danger for energy demand if it can’t be brought under control.
  • Europe’s biggest oil refiner is making an unusual foray into the North Sea crude market as a recovery in the continent’s fuel demand gathers pace at a time when the number of cargoes available from nearby producer regions is increasingly becoming constrained.

--With assistance from Ann Koh, James Thornhill, Javier Blas and Alex Longley.

To contact the reporter on this story:
Hailey Waller in New York at hwaller@bloomberg.net

To contact the editors responsible for this story:
Mike Jeffers at mjeffers2@bloomberg.net
Catherine Traywick, Jessica Summers



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