Oil gains on signs of output cuts, improved demand
Oil prices rose slightly on Tuesday amid signs that producers are cutting output as promised just as demand picks up, stoked by more countries easing out of curbs imposed to counter the coronavirus pandemic.
Benchmark Brent crude climbed 7 cents or 0.2 percent to $34.88 a barrel by 0907 GMT, after earlier touching its highest since April 9.
U.S. West Texas Intermediate crude was up 70 cents, or 2.2percent at $32.52 a barrel.
“The market sees both forces aligning: the cuts OPEC+ promised are materialising and other non-member production shut-downs are also really helping to limit the oversupply,” said Paola Rodriguez Masiu, senior oil markets analyst at Rystad Energy.
“Meanwhile, lockdown measures are removed globally and the economy needs fuel to restart.”
The June WTI contract expires on Tuesday, but there was little sign of a repeat of the historic plunge below zero seen last month ago on the eve of the May contract’s expiry amid signs of rising demand for crude and fuels.
The July WTI contract was up 12 cents per barrel at $31.77.
The market was boosted earlier by signs that output cuts agreed by the Organization of the Petroleum Exporting Countries (OPEC) and others including Russia, a group known as OPEC+, are being implemented.
OPEC+ cut its oil exports sharply in the first half of May, companies that track shipments said, suggesting a strong start in complying with their latest pact to curb output.
U.S. production is also falling, with crude output from seven major shale formations expected to fall to 7.822 million barrels per day in June, the lowest since August 2018, according to the U.S. Energy Information Administration.
A recovery in fuel demand in India also gathered momentum in the first half of May.
Still, global demand recovery is expected to be slow as some restrictions remain and there is a significant risk of repeat outbreaks and lockdowns.
The Eurasia group urged caution on oil consumption, citing “a global recession, cautious consumers, and a later and potentially worse peak of the coronavirus outbreak in emerging markets such as Latin America, Africa, and South Asia”.
US oil producers have been expected for some time to have to shut down oil production as a result of the Covid-19 pandemic, but they were initially slow to move. Now that profitability and storage limitations have started to hurt, the curtailment wave has accelerated. A Rystad Energy analysis shows that gross US cuts could reach at least 2 million barrels per day (bpd) in June, including liquids.
Net oil production cuts could reach 835,000 bpd in May and 877,000 bpd in June, compared to around 256,000 bpd in April, according to Rystad Energy’s interpretation of early communication from 31 US oil producers.
This represents gross curtailments (including royalties to the government) of over 1 million bpd in both May and June, and at least 1.5 million bpd if total gross liquids output is considered. Adding the potential uncommunicated contribution from private and smaller operators, who are also likely to struggle, total Covid-19-related gross liquids output curtailments could easily hit at least 2 million bpd in June.