As the economy reopens, oil prices rebound

Thanks to the economic reopening, oil is starting to leave behind its worst moments in the markets. Brent's barrel, the benchmark for Europe and the Middle East, climbed to $30 on Tuesday and West Texas Intermediate (WTI), the benchmark for the United States, was traded for $24. "The market is still vulnerable but the demand bottom is behind us, and this is manifesting in oil prices which are on the rise", explains Per Magnus Nysveen, Rystad Energy's head of analysis, in a report for clients of the energy consultancy firm.   

The production cuts agreed by OPEC+ came into effect last Friday and have been received with optimism by investors. "Prices cannot be constantly down, the increase in demand is very positive for the market, but beware. Prices will go down again and bottom out again by the end of May," says Nysveen's chief analyst.   

However, overproduction and storage of crude oil are still unresolved and volatility could return to the markets in the coming weeks. "Production must continue to decline. Some US producers have announced closures and withdrawn up to a million barrels a day from the March peak," said Rystad Energy.   

"The lack of space to store oil is already a problem for many regions. OPEC+ cuts will not restore the balance, as the gap between supply and demand is too big," explains Bjornar Tonhaugen, head of the oil market, in a report from Rystad Energy. The reopening of the business is giving a temporary boost to prices, but market professionals are aware that this is not enough. Analysts at the Oslo-based energy consulting firm expect new lows of $20 in the second quarter of the year.   

Oil market professionals are still cautious about this upturn. "I'm afraid that prices will collapse again because of the hope of a quick recovery and that it will eventually translate into another disappointment," Matt Stanley, a broker in Dubai, told the Starfuels consulting firm.   

Goldman Sachs forecasts that oil prices will gradually recover and that next year Brent's barrel will be exchanged at $51.38 and WTI at $55.63. “Demand is also beginning to recover from a low base, led by a restarting Chinese economy and improving transportation demand in developed market economies”, the bank said. 

Morgan Stanley forecast Brent to rise steadily to $35 by the end of the year. The bank did not expect an immediate rally but “the greatest mismatch in supply/demand is probably behind us,” it said.  The bank said the peak of oversupply in global markets had probably been reached and storage is beginning to overcome. "Oil reserves have accumulated, but not as strongly as feared," explain the analysts at Morgan Stanley. 

In addition, "the market is starting to realize that demand destruction has been terrible, but we’re reopening and demand is going to get better", the Price Futures Group analyst told Arab News.   

Saudi Arabia’s crude oil exports in May are expected to drop to about 6 million barrels a day, the lowest in almost a decade, under the OPEC+ agreement, analysts told the Reuters news agency. Swiss bank UBS forecasts that the relaxation of coronavirus restrictions in many countries will help balance supply and demand, leading to a shortfall in supply by the end of the year.  

US President Donald Trump, who has attacked OPEC+ in the past for keeping oil prices high to the detriment of American consumers, has written on his Twitter profile that: “Oil prices moving up nicely as demand begins again!”