No gusher, but oil prices starting to bounce back
HOUSTON — Driving in the United States and Europe is picking up. Refineries in China are buying more oil as that country’s economy reopens. Saudi Arabia and Russia ended their price war and slashed production, and U.S. oil companies are decommissioning rigs and shutting wells.
All those developments have helped push up oil prices modestly in recent weeks. On Tuesday, U.S. oil futures climbed 68 cents to $32.50 a barrel after an 8% surge Monday.
That may seem like a minor miracle given that the price is more than $60 above where it was just weeks ago. On April 20, the U.S. oil futures contract fell below zero for the first time as some traders paid buyers to take oil off their hands.
“May, it seems, is a month when traders can finally sit back more comfortably for a moment and take a breath,” said Bjornar Tonhaugen, head of oil market research at Rystad Energy, a research and consulting firm. “But we warn that the second half of the year will not be met with precrisis oil prices again, as the gigantic oil stock overhang must be worked down.”
Even after the recent rally, oil prices are roughly half of what they were at the beginning of the year.
Energy experts warn that oil prices may dip again if there is another surge in coronavirus cases and deaths as governments begin allowing businesses to reopen and encourage people to move more freely.
Prices could also fall when tankers filled with more than 50 million barrels of crude oil from Saudi Arabia reach the United States in the next two months. That supply could overwhelm storage facilities, pipelines and refineries, leaving little room for domestic production.
Demand for oil and petroleum products fell sharply in recent weeks as people stopped commuting, airlines cut schedules and factories closed. But there are signs that demand for petroleum products is beginning to recover, especially the demand for gasoline.
The International Energy Agency expects U.S. gasoline demand this month to be down 25% from May 2019 — a big improvement from the 40% decline in April. Demand has also rebounded in many European countries that are slowly allowing businesses to reopen.
On the supply side, Saudi Arabia, the Organization of the Petroleum Exporting Countries and their allies are reducing production. The Energy Department estimates that OPEC production will fall below 24.1 million barrels a day by June, a 6.3 million-barrel decline from April. Russia, which has coordinated with Saudi Arabia in recent years, is expected to cut its production by 800,000 barrels a day from last year.
But the most drastic cuts are coming in the United States. U.S. oil production has already plummeted by 900,000 barrels a day since February, a 7% decline. Analysts said they expected the industry to cut an additional 2 million barrels a day by the end of the year as companies shut more wells and production from other wells declines naturally.