Oil up on signs of rising demand, falling production
Futures shift from loss to gain despite COVID-19 concerns
Oil flipped from a loss to a gain with investors shifting their focus from a potential second wave of COVID-19 outbreaks to signs of improving demand and declining production.
Futures in New York rose as much as1.7 per cent on Monday, after earlier falling as much as 5.2 per cent. Iraq cut term oil sales to multiple Asian and European refiners, according to people familiar with the matter, signalling that the nation is making good on its OPEC-plus pledge to trim a global supply glut. At the same time, United Arab Emirates Energy Minister Suhail Al Mazrouei said demand is growing in China, India and Europe. Equity markets also pared losses.
“Even as the global markets are in the grips of a resurgence of risk aversion tied to new COVID outbreaks in China and the U.S., oil fundamentals are still moving in the right direction,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas.
Crude’s six-week rally fizzled on Friday amid concerns the worst of the virus isn’t yet over and as the U.S. Federal Reserve warned the pandemic could inflict lasting damage on the American economy. BP Plc’s announcement on Monday that it will write down the value of the business by the most in a decade reinforced the picture of an industry in turmoil.
“Fear has started sprouting again,” said Bjornar Tonhaugen, head of oil markets at consultant Rystad Energy A/S in Oslo. “Concerns that we may be seeing the beginning of a second wave of the pandemic are dominating trading floors.” West Texas Intermediate crude for July settlement rose 74 cents to $37 (U.S.) a barrel on the New York Mercantile Exchange. Brent for August delivery gained 62 cents to $39.35 on the ICE Futures Europe exchange after dropping 8.4 per cent last week.
There are signs that the physical oil market is tightening.
“China’s economy is recovering, OPEC producers are cutting the supply of the their July barrels,” Tchilinguirian said. “These trends are positive for oil, helping to at least partially buffer it from broader risk-related developments.”
OPEC and its allies have agreed to maintain production cutbacks amounting to about10 per cent of global supply into next month, and will hold committee meetings on Wednesday and Thursday to assess their impact.
Saudi Arabia will deliver between 10 per cent and 40 per cent less crude than requested to seven refiners in Asia in July, according to refinery officials who asked not to be identified. Iraq, which has typically lagged in implementing its agreed cuts, instructed BP to reduce output by 10 per cent at the country’s biggest oilfield.
“The U.S. shale patch will be very important for global balances and will influence what Saudi and Russia do on the month-to-month extension of their deal,” said Tamar Essner, director of energy and utilities at Nasdaq.
On the demand side, Chinese official figures showed refinery runs in Asia’s largest economy rose last month on a year-overyear basis. Refineries processed 13.69 million barrels a day in May, according to Bloomberg calculations based on figures from the nation’s statistics bureau.
That was 7.5 per cent higher than in April and 8.2 per cent more than a year earlier.