US oil futures rise above $30 for the first time in two months

Supply cuts and the easing of lockdown measures are exerting upward pressure on prices

An aerial view of a crude oil storage facility at WTI's physical delivery point in Cushing, Oklahoma. Limited capacity at Cushing was one of the reasons behind the benchmark's plunge into negative territory in April. AFPShow less

US futures surged past $30 per barrel for the first time in two months as Opec+ output cuts and production shut-ins among independent producers rebalanced a market hit hard by the coronavirus pandemic.

West Texas Intermediate, the US benchmark, was up 11.38 per cent at $32.78 per barrel at 8.16pm UAE time. Brent, the international crude bench­mark, was up 8.86 per cent at $35.38 per barrel.

WTI's ascent above $30 is in sharp contrast to its performance during the same time last month when it plunged to a record low of -$40 per barrel as the May futures contract neared expiring.

The oil market has regained some stability since last month's volatility, when inventories were higher and fears of storage reaching capacity grew, exerting downward pressures on both benchmarks.

"It’s a far cry from the negative prices of a month ago that everyone understood wasn’t anything close to a proper valuation," said Jasper Lawler, head of research at London Capital Group. "The surprise drop in US crude stockpiles last week means storage is no longer the central issue."

US inventories made a surprising recovery last week. The US Energy Information Administration reported oil stocks fell 700,000 bpd, beating expectations by S&P Platts of a rise in inventory levels by 4.8 million barrels. Inventories at Cushing, Oklahoma, the physical delivery point for WTI crude also fell 3m barrels, easing concerns of storage capacity reaching its limits.

Collective action by the Opec+ alliance, which agreed to cut 9.7m barrels per day, has offered some relief to a saturated market. Saudi Arabia, the UAE, and Kuwait also increased their voluntary commitments last week. Riyadh pledged to cut a further 1m bpd, bringing its output to the lowest in 18 years. Meanwhile, the UAE and Kuwait also said they would draw back 100,000 bpd and 80,000 bpd in June.

The "gradual re-opening" of global economies played a part in the oil market's resurgence, said Thirumalai Nagesh, economist at Abu Dhabi Commercial Bank.

"The demand for oil has improved with the resumption of economic activity. On the supply side, key GCC producers, including Saudi Arabia, [the] UAE and Kuwait have announced further production cuts to help markets recover from the deep supply glut conditions of April," he said.

"Overall, the positive developments in both supply and demand-side factors have helped improve oil market sentiment," Mr Nagesh added.

Analysts had cautioned of a possible repeat of US crude futures slipping into negative territory towards the expiry of the June contract.

The USO oil fund, whose small-time investors were blamed for the sub-zero sell-off, exited its position from the June contract last month, due to a backlash over its role in the market crash. Contracts for July and Au­gust also remained above $30 during the opening session, later trading at $32. 49 and $32.98 per barrel at 8.17pm UAE time, respectively.
"The broader recovery in physical crude continues with market structure and differentials strengthening again at the end of the week," JBC Energy said in a note on Monday.

Declines in US crude inventory, as well as rig counts, which slumped last week to the lowest level since September 2009, upward revisions to demand growth from the IEA, increasing mobility in some countries as well as deepening of cuts by some Opec members, are behind oil's recovery.

"All this is giving the market licence to be exuberant, and also notable in this context is the continued upside to speculative net length in crude last week," JBC said in a note.

"However, incoming data continues to paint a picture of economic damage, including slumping retail sales and factory output, high unemployment, and deep GDP declines for the early parts of the year," it cautioned.

Gold, which has a tight relationship with oil and is a traditional safe haven for investors in times of volatility, rose to $1,763.70 (Dh6,748.07) per ounce, the highest since October 2012. It was trading at $1,732.60 per ounce at 8.22pm UAE time.

The latest increase in bullion came after the US Federal Reserve said stocks and asset prices might take a major hit from the coronavirus pandemic and a recovery might not happen until the end of 2021.

Gold has surged 16 per cent this year as the spread of the virus crimped growth, led to lockdowns worldwide and forced governments and central banks to roll out stimulus and relief packages.