As we near the end of May, we will put behind us one of the most bullish rallies for the WTI crude oil contract in history with crude jumping almost 75% this month alone. Of course, with WTI prices currently trading at $33.33/barrel, that’s not saying much, as it is widely perceived the breakeven price for domestic crude producers is $32/barrel. The question is: will this rally persist? Let’s review some components to watch out for this summer.
First, we need to watch how the re-openings of the U.S. and global economy go throughout the next few months. If we can gradually return to spending in our economy and the coronavirus case numbers do not rise as much as they have been over the past few months on the John Hopkins Coronavirus Resource Center page, this should bode well for a slow return of fuel demand which would be bullish for prices. That is, unless COVID-19 returns in the Fall. More on that later.
Second, we need to focus on OPEC+ production cuts put into place for this year and if the consortium deviates from their strategy put forth last month. If you recall, OPEC+ decided to cut 9.7 million barrels per day (bpd) in May and June, 7.6 million bpd July – December, and 5.6 million bpd January 2021 – April 2022. Just this week, some members of OPEC want to extend the 9.7 million bpd cuts past June, but there appears to be one country that isn’t keen on doing so: Russia. With global oil demand still well below normal, if Russia doesn’t agree to extend the hefty production cut, we could see inventories continue to build which would put a lid on prices.
Third, the recent tensions between the U.S. and China are something to note as each country may begin sanctioning each other or worst case scenario, withdraw the phase one trade agreement struck in January, as a result of China recently passing national security legislation which would infringe on the “one country, two systems” philosophy in place since 1997. This legislation would essentially allow China to spy on Hong Kong and make it adhere to its rule of law, threatening Hong Kong’s independence. This drew great disdain from other world powers, with the U.S. being the most vocal as President Trump announced he will host a news conference about China today. The presumption is the President will sanction China in some way and most likely illicit a response from China, which could potentially escalate into a deteriorating trade relationship and be detrimental to the global economy at a very inopportune time as we continue to battle COVID-19.
Speaking of COVID-19 and my final point, we need to watch in the early Fall the extent of the return of the virus. If we can make medical breakthroughs and can social distance properly to stave off another spread, that would be a wonderful success and bullish for oil prices. However, if we need to do another round of stay-at-home orders and the hospitals become overrun again, we may see another downturn in prices regardless of how much OPEC+ cuts.
June RBOB currently trades lower by $0.0101 to $0.9884/gallon and ULSD trades higher by $0.0113 to $0.9369/gallon.
