After an enormous rally, oil prices have started to ease off today. The West Texas crude oil’s July contract crossed above $34 per barrel on Tuesday this week, which left many traders scratching their heads. There is no doubt that the oil prices run a risk of a correction, as both WTI and Brent prices rose precipitously during the past few weeks.
Supply: OPEC and Non-OPEC
The rally that caused the WTI crude oil price to cross this level came as a result of comments from Alexander Novak, Russia’s Energy Minister. As a member of OPEC+, Russia is encouraging oil traders by saying that it expects the oil market to rebalance as soon as June or July. Novak’s view was that the current supply-cut figures exceeded those agreed on by the coalition.
Key allies, such as OPEC and Russia, have helped to cut oil production; however, it’s been Saudi Arabia that’s enacted the most significant oil production cut.
So far, total oil production has decreased by 14 to 15 million b/d, and Non-OPEC countries, such as Norway, Canada, Mexico, and the US have contributed cuts equalling approximately 3.5 million to 4 million b/d.
The minister reiterated these figures in his statement on Monday. Mr. Novak’s view was that the current global supply cut exceeded that which was agreed by the coalition.
During the past few weeks, the US crude inventory data has demonstrated a consistent drawdown trend larger than what was forecast. Later today, we will have the crude oil inventory data and the forecast for another drawdown of -2.5M. Last week’s data confirmed the reading of -5.0M.
How about Oil Demand and Business Activity?
The world consumed nearly 100 million b/d last year before COVID-19 diminished the demand. Many believe that last year’s oil consumption marked the peak because there is also an element of social responsibility that is pushing consumers away from fossil fuels. However, it has been Coronavirus that has had the greatest impact on oil demand until now.
As expected, consumption has increased as the global lockdown measures have eased off and business activity has started to return to its baseline. However, we are still far from reaching the pre-coronavirus level on a global basis. With different regions being hit by the virus at varying levels, global demand is slowly ramping up, rather than returning as if by flicking a light switch.
On the other hand, there have been some reports that oil demand has already reached pre-COVID levels in China. One way of confirming this is by looking at China’s independent refiners known as teapots. These teapots have processed a record volume of imported crude during the last month. Currently, they are handling more than 2 million b/d, which is the highest level since January 2015, while back in March, the volume stood at 1.55 million b/d.