Author: Daniel Lerch

Oil prices posted a sixth weekly gain in London, more than doubling to $42.30 a barrel since April as demand recovers from the lockdowns. NY futures closed at 39.55 on Friday, up $2.14 for the day. The price jump came after the US Labor Department reported that US non-farm payrolls increased by 2.5 million jobs in May, far exceeding market expectations for a fall of more than 7 million jobs. Later it was learned that the Labor Department’s May survey had methodological problems arising from many surveyed workers not knowing whether they were “unemployed” or just temporarily furloughed from their regular jobs.

Prices: Futures were volatile last week with prices bouncing between $31 and $35 a barrel in response to the latest news. Oil closed out May on Friday with a record monthly gain of 88 percent on hopes demand for oil would continue to rise as economies reopen and crude production continues to fall. The status of the US-China trade agreement is in doubt as relations continue to deteriorate and resurgence of the coronavirus as lockdowns are lifted will be a significant factor in the movement of oil prices during the next few weeks.

The four-week run of climbing crude prices continued through Wednesday, but prices fell on Thursday and Friday as doubts arose over the prospects for China’s economy and rising tensions with the US over the virus, the trade deal, and Hong Kong. Beijing said on Friday that it would not publish a growth target for 2020, casting doubts as to how quickly demand for oil will revive. Futures prices closed Friday above $33 in New York and $36 in London.

Oil prices continued to rise last week despite the uncertainty surrounding COVID-19. New York futures closed at $29.43 and Brent at $32.50. As US storage capacity is limited, it is questionable whether cash oil prices are as high as speculators have driven futures. US crude stocks decreased slightly the week before, raising the question of whether there is enough demand to consume new production. Washington now is allowing producers to put crude that they can’t sell to refineries or put into commercial storage to be pumped temporarily into the Strategic Petroleum Reserve.

Oil posted its first back-to-back weekly gain since February amid optimism that production cuts are beginning to eat into the massive supply glut. Futures in New York climbed 25 percent to circa $25 and $31 in London. Drillers are cutting production rapidly in response to ruinous crude prices. The number of US rigs drilling for oil fell to a level not seen since before the shale-oil revolution began at the beginning of the last decade. Last week’s data from the EIA supported the price move as US gasoline supplied, an indicator of consumption, rose by the most in almost two years last week, and nationwide crude production declined for a fifth straight week to the lowest since July 2019.

Crude posted its first weekly gain in a month as global production cuts start to lift physical markets. Futures in New York rose 17 percent last week to close at $19.78 in NY and $26.44 in London. Oil companies have announced significant production closures with Chevron saying it will shut down as much as 400,000 barrels of daily output, and Exxon reporting it will cut rigs in the Permian Basin by 75 percent by the end of the year. At the same time, OPEC+’s pledge to trim supply by 9.7 million b/d has gone into effect. Algerian Energy Minister Arkab, who holds OPEC’s rotating presidency, called on members of the cartel to implement more than 100 percent of their agreed production cuts. Globally, the number of rigs drilling for oil and gas fell almost 20 percent in April, and in the US, the oil rig count dropped by 53 to 325, a seventh straight week of declines.

The long-awaited crash in the oil markets came last week when traders finally realized that oil consumption was so low and production was so high that the world was within weeks of having no place to store crude and oil products. The crash, precipitated by the expiration of the May NY futures contract, was violent, falling from $20 a barrel to a low of minus $37 a barrel, a plunge unprecedented in the history of the oil industry. London’s Brent followed New York’s decline and closed out the week at $22 a barrel.

The global demand for oil is expected to be down by nearly 30 million (or maybe even 40 million) b/d in April, according to the latest estimates. Some forecasts still optimistically assume that demand will bounce back in the second half of the year in a “V-shaped” recovery. Most of these forecasts, however, come from financial institutions that want customers to believe that normalcy will return soon or, in the case of government agencies, are influenced by politicians who wish to remain in office. The more pessimistic forecasts come from the oil trading firms who make money by getting the numbers right.

It was a volatile week as the world’s major oil producers struggled to find a way to raise prices from ruinous levels as the global consumption of oil sank by about a third from pre-virus levels. Reports of new highs in the virus infection count and death toll continue to pour in from all over the world, suggesting that the demand for fossil fuels still has a way to fall.

Last week saw one of the biggest price leaps in the history of the oil industry, with US futures surging from around $20 a barrel at mid-week to a close of $28.34 on Friday. The surprise surge came after President Trump tweeted Thursday morning that the Saudis and Russia were going to cut production by “10 million barrels or may be substantially more.” The tweet came after Trump talked with the Saudi crown prince. Later in the day, Moscow weighed in to say that it was unaware of such an agreement and that the Saudis were making every effort to increase, not cut oil production.