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May
29
2020

Oil Is Unlikely To Go Much Higher
Nick Cunningham

Oil prices have climbed nearly uninterrupted since late April, but the gains could be coming to an end.  On Friday, oil prices fell sharply, hitting the pause button on a rally that saw WTI rebound from -$37 per barrel on April 20, to nearly $34 per barrel on May 21, a more than $70-per-barrel swing in just a few weeks. Of course, the plunge deep into negative territory was likely a unique, one-off phenomenon. Nevertheless, the rally back into (positive) $30 territory has been impressive. 

Of note, China’s oil demand has climbed back to about 13 million barrels per day (mb/d), a swift rebound that undergirded improving market sentiment. With China’s demand back to about 90 percent of pre-pandemic levels, oil traders are clearly holding out hopes of a quick rebound elsewhere. 

Meanwhile, the rapid shut in of production in North America combined with the OPEC+ production cuts has meant that the supply side of the equation is doing its part. More than 2.2 mb/d of U.S. oil production has been shut in, according to comments from the U.S. Secretary of Energy, a faster curtailment than expected. There has been a raft of investment bank forecasts that have predicted a supply deficit in the second half of 2020. 

But the optimism surrounding the oil market, such as it is, may be going too far. On Friday, the Chinese government said that it would not offer up a GDP growth target for 2020, highlighting the serious challenges facing the world’s second largest economy. Beijing pointed to “great uncertainty” because of the coronavirus. The government also declined to undertake massive government stimulus in the same way that it did in the wake of the global financial crisis a decade ago.

Rising tension between the U.S. and China are also weighing on global markets. For political reasons, the leadership in both countries are blaming the other for the coronavirus. The spat could fuel more conflict, perhaps unraveling the “phase 1” trade deal or provoking some other trade retaliation. 

In the U.S., crude inventories fell by 5.6 million barrels last week, a huge draw, but gasoline stocks actually increased, muddying the outlook. “After weeks of rising, US gasoline demand was down again for the first time. Demand (for oil products) also remains very subdued elsewhere,” Commerzbank said in a note on Friday. “With concerns on the demand side remaining we regard the latest price rally on the oil market to be excessive.”

At the same time, the run up in oil prices occurred alongside a buildup in speculative bets on oil futures. That helped fuel price gains, but it also exposes the market to a correction back in the other direction. “The extremely positive positioning of investors, especially in WTI, makes the oil market susceptible to price corrections in the event of any emerging doubts and uncertainties,” Commerzbank said. 

Most importantly, despite assurances from Trump administration officials, a V-shaped recovery is extremely unlikely. President Trump has repeated this prediction, saying just days ago: “I think you’re going to have a ‘V.’ I think it’s going to be terrific.” 

His top economic adviser Larry Kudlow has said the same, although he dialed back the optimism on Thursday while trying not to disagree with his boss. 

Sure, the U.S. will see a V-shaped recovery, Kudlow said, but the “V” might not look exactly like a V. “You can have your own Vs. There’s Vs. There are lesser Vs,” Kudlow said. “There are combos of Us and Vs.” 

With more than 38 million people applying for unemployment in the past two months, and the pandemic still raging, a fully recovery is a long way off. “[F]ew traders are pricing in any significant sustained global recession,” Standard Chartered said in a report. “All that optimism has, in our view, left prices slightly above the top of their sustainable short-term trading range.” 

At the same time, there is little reason to think that the U.S. or any other country can avoid a second wave of infections after reopening.  

“A second wave is not such a remote possibility and a new round of lockdowns could send [oil] prices back to much lower levels very quickly, and the market knows it,” Rystad Energy said on Friday in a statement. “Therefore lower prices this morning are not a surprise, and they are not necessarily the result of a market event, they are rather a correction of the consecutive boosts that oil has seen over the last days. 

Still, the data firm said that it sees oil stabilizing in the $30-$35 range, with “potential in the 40s” only later in the year “when and if demand strengthens and approaches pre-Covid-19 levels.”

By Nick Cunningham of Oilprice.com

John W. Whitehead is an attorney and author who has written, debated and practiced widely in the area of constitutional law and human rights. Whitehead's concern for the persecuted and oppressed led him, in 1982, to establish The Rutherford Institute, a nonprofit civil liberties and human rights organization whose international headquarters are located in Charlottesville, Virginia. Whitehead serves as the Institute’s president and spokesperson, in addition to writing a weekly commentary that is posted on The Rutherford Institute’s website (www.rutherford.org), as well being distributed to several hundred newspapers, and hosting a national public service radio campaign. Whitehead's aggressive, pioneering approach to civil liberties issues has earned him numerous accolades, including the Hungarian Medal of Freedom.

Whitehead has been the subject of numerous newspaper, magazine and television profiles, ranging from Gentleman's Quarterly to CBS' 60 Minutes. Articles by Whitehead have been printed in the New York Times, Los Angeles Times, the Washington Post and USA Today, among others.

Whitehead gained international renown as a result of his role as co-counsel in Paula Jones' sexual harassment lawsuit against President Clinton. Whitehead continues to speak out in defense of a woman's right to be free from sexual harassment and frequently comments on a variety of legal issues in the national media. He has been interviewed by the following national and international media (partial list): Crossfire, O’Reilly Factor, CNN Headline News, Larry King Live, Nightline, Dateline, The Today Show, Good Morning America, CBS Evening News, CBS This Morning, This Week with Sam and Cokie, Rivera Live, Burden of Proof, Late Edition with Wolf Blitzer, FOX News Sunday, Hardball, the New York Times, the Washington Post, the Wall Street Journal, USA Today, National Public Radio, BBC Newsnight, BBC Radio, British Sky "Tonight" and "Sunday," TF1 (French TV) and Greek national television.

The author of numerous books on a variety of legal and social issues, as well as pamphlets and brochures providing legal information to the general public, Whitehead has also written numerous magazine and journal articles. Whitehead's most recent books include Battlefield America: The War on the American People and A Government of Wolves: The Emerging American Police State. In addition, he wrote and directed the documentary video series Grasping for the Wind, as well as its companion book, which focus on key cultural events of the 20th Century. The series received two Silver World Medals at the New York Film and Video Festival and is now available on DVD.

Whitehead has filed numerous amicus briefs before the U.S. Supreme Court. He has also been co-counsel in several landmark Supreme Court cases as well. His law reviews have been published in Emory Law Journal, Pepperdine Law Review, Harvard Journal on Legislation, Washington and Lee Law Review, Cumberland Law Review, Tulsa Law Journal and the Temple University Civil Rights Law Review.

Born in 1946 in Tennessee, John W. Whitehead earned a Bachelor of Arts degree from the University of Arkansas in 1969 and a Juris Doctorate degree from the University of Arkansas School of Law in 1974. He served as an officer in the United States Army from 1969 to 1971.

www.rutherford.org