Oil faces demand uncertainty after record rebound from the crash

On Friday, US futures rose above $35 a barrel for the first time since March

Oil pumps at the Eagle Ford Shale oil field in Karnes County, Texas. While virus-related lockdowns are easing, demand has not roared back yet in the US. Reuters

The price of oil posted its biggest monthly advance on record, a few weeks after it plunged below zero.

Crude surged about 88 per cent in May, while US futures rose above $35 a barrel on Friday for the first time since March, driven by supply curbs across the world. Still, prices were well below levels at the start of the year, and demand that was crushed by the coronavirus crisis may have to sustain improvement for the rally to continue.

For now, the outlook for consumption looks bleak, although it is on the mend. While virus-related lockdowns are easing, demand is not yet roaring back in the US. Fuel sales that were clobbered in European nations such as Spain and Italy will take time to recover. China is a bright spot, but the rest of Asia is still struggling.

The number of rigs drilling for oil in the US fell for the eleventh week, stemming the glut of crude that flooded the market. Yet there is a risk that oil’s advance could tempt producers to turn on their taps again.

“At the end of the day, what is driving everything is fuel demand,” said Tom O’Connor, senior director of petroleum markets at global consultancy ICF. “There is going to be an underlying depression in demand that is going to be there for some time.”

US crude futures fluctuated on Friday, as Federal Reserve chairman Jerome Powell defended aggressive action to shield the economy as the coronavirus pandemic took hold. Prices surged at the close, with West Texas Intermediate oil settling 5.3 per cent higher at $35.49 a barrel, after falling as much as 4 per cent earlier in the day. Futures posted the biggest monthly jump in data going back to 1983.

Brent crude for July, which expires on June 5, rose $0.04 to $35.33, closing below WTI for the first time since 2016. The global benchmark has rallied almost 40 per cent this month. The more active August contract rose 5 per cent to settle at $37.84.

Meanwhile, US President Donald Trump has discussed putting targeted sanctions and trade measures on China’s financial sector.

“It’s a bit of a potentially volatile environment right now,” Mr O’Connor said regarding tensions between the world’s two largest economies. “If it affects relationships to the point that the Chinese aren’t going to take crude exports from the US, that would have a negative effect.”