Weekly Energy Recap: Improving Sentiment Before Fundamentals Change
Summary
- While sentiment is improving, the market fundamentals have not as the oil surplus needs time to be absorbed.
- The OPEC+ output cuts have just started and have yet to make an impact on market fundamentals.
- Stronger transportation fuel demand from the US, China and Europe with traffic returning to the streets, is helping to support a boost in fuel use and refining rates.
The month of drama in the oil markets appears to be at an end finally, as prices recorded their first weekly gain since the start of April.
While sentiment is improving, the market fundamentals have not as the oil surplus needs time to be absorbed from the market as economic activity recovers. A similar glut of crude oil and petroleum refined products will also need some time to be depleted.
Although the historical OPEC+ output cuts have just started and have yet to make an impact on market fundamentals, they have nonetheless impacted market sentiment.
Hence, oil prices rose as global production cuts deepened and signs of a fledgling demand recovery emerged. However, it will still take time for the world to consume what is already in storage.
The start of May loading means lower production and fewer barrels to the market from OPEC+, also from other non-OPEC producers, and this will have a huge impact on the gradual re-balancing of the oil market. The market has been waiting anxiously for the start of May barrels.
Stronger transportation fuel demand from the US, China and Europe with traffic returning to the streets, is helping to support a boost in fuel use and refining rates. This sudden demand rebound has improved the physical market noticeably.
In fact, data from the US showed the biggest weekly jump in gasoline demand in almost a year last as stockpiles of the fuel shrank. At the same time, rush hour traffic in some of China's biggest cities is returning to pre-virus levels.
Therefore, refining margins are likely to improve in the second quarter as countries reopen businesses that were closed through efforts to contain the coronavirus pandemic.
Still, it may take some time to restore refined product demand that has nosedived as a result of lockdowns globally.
Baker Hughes reported a big weekly drop in the US rig count which was down by 64 rigs from the previous week to 465 - with oil rigs down 60 to 378, and gas rigs down by four to 85.
Year on year, the US rig count is down 526 rigs from last year's 991.
Look at the month of April overall, Baker Hughes reported that the US rig count was 566, compared to 772 counted in March 2020.
Meanwhile, the worldwide rig count for April 2020 was 1,514, compared to 1,964 counted in March 2020, and down 626 from the 2,140 counted in April 2019.
Speculation remained strong in the futures markets over the week. Money managers increased net-long positions in Brent crude oil futures and options by 9,007 contracts to 143,126 in the week ending April 28. This represents a seven-week high. At the same time, money managers were also long on WTI crude oil futures and options - which increased by 73,564 contracts to 283,298 - a 16-week high.
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