After every extensive sell-off, there is a relief rally, and this is exactly what we are experiencing in oil prices. The front end (June) contracts for Crude and Brent have rallied and the oil prices are trying to win the investor communities confidence back. However, it will take a very long time for that to happen, especially after the massive damage that the negative prices have caused. Whenever you will look at an oil trading contract, it will always remind you of the possibility of negative prices.
Nonetheless, the extreme contango conditions that we experienced earlier this week have eased off, to some extent, and this has also taken the pressure off oil sensitive currencies.
The fact that the EIA data (released yesterday—the number showed more surplus of oil) failed to push the prices lower was a clear sign that all the bad news is already priced in, and a relief rally is on its way. This mean-reversion rally can push the prices up by another few percentages.
In terms of crude oil’s front-month contract, the price is up more than 145% from its low of $6.50, but the prices are still down over 39% since the massive sell-off (when crude oil’s June contract fell from the 25 dollar level). For now, it is immensely difficult for the prices to climb back above the $20mark, especially for the June contract.
However, if the price does cross the $20 mark, and stays above that mark, then we will be out of the woods. The question is how can that happen?
Well, for a start, the global economic lockdown is going to ease off next month and it is a positive sentiment that will triumph the supply glut concerns. Investors will pay more attention to the good news, life returning to normality, rather than the excessive supply.
On the fundamental side, the real reason that we have seen the oil prices moving higher is mainly due to two factors. Firstly, it is the tweet of the US president that has escalated the tensions between the US and Iran after he cleared the US military to attack the Iranian boats if they harass the US navy ship. According to Trump that is harassment, many may disagree with his definition of harassment.
Secondly, there is a real possibility of a substantial production cut from the US oil producers as they are likely to be paid to keep oil underground. This payment will be in the name of saving the US shale oil industry.
The bottom line is, that there is no doubt in saying that oil prices have been hit the most and there was a real discount especially in the front-end contracts, but the question is if the rally in front months is going to push the prices higher for later month contracts. This can only happen if investors become more optimistic about oil prices.