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What Is Moving Oil Prices?

What Is Moving Oil Prices?

After an enormous rally, oil prices have started toease off today. The West Texas crude oil’s July contract crossed above $34 perbarrel 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 Brentprices roseprecipitously 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.

Duringthe past few weeks, the US crude inventory data has demonstrated a consistent drawdowntrend larger than what was forecast. Later today, we will have the crude oilinventory data and the forecast for another drawdown of -2.5M. Last week’s dataconfirmed the reading of -5.0M. 

How aboutOil Demand and Business Activity?

Theworld consumed nearly 100 million b/d last year before COVID-19 diminished thedemand. Many believethat last year’s oil consumption marked the peak because there is also anelement of social responsibility that is pushing consumers away from fossilfuels. However, it has been Coronavirus that has had the greatest impact on oildemand until now. 

As expected, consumption has increased as the global lockdown measureshave eased off and business activity has started to return to its baseline. However, we are still far from reachingthe pre-coronavirus level on a global basis. With different regions being hit bythe 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.