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Oil Wraps Up Best Quarter Since 1990: Where's it Headed Next?
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U.S. oil prices posted a gain of 92% over the past three months - the largest quarterly increase since the 1990 Gulf War. Interestingly, for the three-month period ending Mar 31, WTI prices fell 66.5% - the largest quarterly percentage decline on record.
Crude for August delivery settled at $39.27 a barrel on the New York Mercantile Exchange Tuesday. For the month, prices are up almost 12% following a record 88% surge in May. The stunning rally follows an unprecedented decline in April when WTI crude futures fell to an all-time low and even went negative for a while, as the coronavirus pandemic destroyed demand amid ramped up production.
Here are three key reasons for the resurgence:
OPEC+ Production Cuts: As far as supply is concerned, the world’s major oil producers continue to curb output in an attempt to tackle a global supply glut and keep prices afloat
Member countries of the OPEC+ group – a coalition between OPEC countries under kingpin Saudi Arabia and non-members led by Russia - decided in June to carry on with their historic cuts in oil output for another month as they battle a global glut of crude due to coronavirus-induced demand destruction.
The alliance, looking to shore up prices, started to withhold output by almost 10 million barrels per day – the largest in history – from May 1. Per the original plan, the initial reduction would have lasted for two months. Beginning July, the production cap would have been relaxed to 8 million barrels per day through the remainder of this year.
However, Riyadh and Moscow agreed to keep the current level of cuts until the end of July. The producer group decided against tapering the existing curbs, which has lifted a barrel of crude from the depths of ‘subzero prices’ to around $40 now.
Rising Demand: The coronavirus pandemic decimated fuel consumption worldwide as curbs on travel and commerce to stem the contagion stalled economies. At the peak of demand loss in late March and early April, fuel usage tumbled roughly 30%. However, there have been signs of modest recovery in gasoline (and therefore, crude) demand on renewed economic activity and easing of lockdown restrictions.
Validating the recovery in usage, The International Energy Agency’s (‘IEA’s) latest Oil Market Report revised up its growth estimates for 2020 global oil demand. The Paris-based organization now projects crude consumption to fall 8.1 million barrels per day to 91.7 million barrels per day this year. While the quantum of decrease is the largest in history, the newest figure represents 500,000 barrels per day lower demand loss compared with last report.
Shale Retreat: While EIA’s latest inventory release reflected a rebound for U.S. production, which rose after 13 weeks, the fact remains that U.S. producers have scaled back operations significantly. Weekly figures show current output at 11 million barrels per day, down from 13.1 million in mid-March.
In particular, volumes from United States’ number one basin – Permian - is set to fall by 7,000 bbl/d month over month to 4.3 MMbbl/d in July – the third month of decline, as the likes of Diamondback Energy (FANG - Free Report) , Cimarex Energy , Concho Resources , Pioneer Natural Resources and others invest a lot less money into the unconventional play in 2020.
Even supermajor Chevron (CVX - Free Report) - carrying a Zacks Rank #2 (Buy) - is slashing production in the Permian Basin. The sharp decline in the oil rig count over the past few weeks, which currently sits at its lowest since 2009, also points to a near-term slowdown in domestic output.
While oil prices have almost doubled in just three months, traders remain worried about the future direction of the commodity. In particular, crude is being pressured by the second wave of coronavirus infections. As several U.S. states experience a spike in new coronavirus infections and hospitalization, there are apprehensions that the country was perhaps premature in re-opening its economy. Resurgence in cases of the deadly pandemic could lead to another lockdown with many businesses forced to close again just after reopening. Moreover, this would create doubts around the trajectory of oil’s demand recovery. As it is, domestic supplies are now at their highest level on record.
In a nutshell, there is still too much supply but little (though improving) demand, suggesting that a sustained move over $40 might be difficult.
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Oil Wraps Up Best Quarter Since 1990: Where's it Headed Next?
U.S. oil prices posted a gain of 92% over the past three months - the largest quarterly increase since the 1990 Gulf War. Interestingly, for the three-month period ending Mar 31, WTI prices fell 66.5% - the largest quarterly percentage decline on record.
Crude for August delivery settled at $39.27 a barrel on the New York Mercantile Exchange Tuesday. For the month, prices are up almost 12% following a record 88% surge in May. The stunning rally follows an unprecedented decline in April when WTI crude futures fell to an all-time low and even went negative for a while, as the coronavirus pandemic destroyed demand amid ramped up production.
Here are three key reasons for the resurgence:
OPEC+ Production Cuts: As far as supply is concerned, the world’s major oil producers continue to curb output in an attempt to tackle a global supply glut and keep prices afloat
Member countries of the OPEC+ group – a coalition between OPEC countries under kingpin Saudi Arabia and non-members led by Russia - decided in June to carry on with their historic cuts in oil output for another month as they battle a global glut of crude due to coronavirus-induced demand destruction.
The alliance, looking to shore up prices, started to withhold output by almost 10 million barrels per day – the largest in history – from May 1. Per the original plan, the initial reduction would have lasted for two months. Beginning July, the production cap would have been relaxed to 8 million barrels per day through the remainder of this year.
However, Riyadh and Moscow agreed to keep the current level of cuts until the end of July. The producer group decided against tapering the existing curbs, which has lifted a barrel of crude from the depths of ‘subzero prices’ to around $40 now.
Rising Demand: The coronavirus pandemic decimated fuel consumption worldwide as curbs on travel and commerce to stem the contagion stalled economies. At the peak of demand loss in late March and early April, fuel usage tumbled roughly 30%. However, there have been signs of modest recovery in gasoline (and therefore, crude) demand on renewed economic activity and easing of lockdown restrictions.
Validating the recovery in usage, The International Energy Agency’s (‘IEA’s) latest Oil Market Report revised up its growth estimates for 2020 global oil demand. The Paris-based organization now projects crude consumption to fall 8.1 million barrels per day to 91.7 million barrels per day this year. While the quantum of decrease is the largest in history, the newest figure represents 500,000 barrels per day lower demand loss compared with last report.
Shale Retreat: While EIA’s latest inventory release reflected a rebound for U.S. production, which rose after 13 weeks, the fact remains that U.S. producers have scaled back operations significantly. Weekly figures show current output at 11 million barrels per day, down from 13.1 million in mid-March.
In particular, volumes from United States’ number one basin – Permian - is set to fall by 7,000 bbl/d month over month to 4.3 MMbbl/d in July – the third month of decline, as the likes of Diamondback Energy (FANG - Free Report) , Cimarex Energy , Concho Resources , Pioneer Natural Resources and others invest a lot less money into the unconventional play in 2020.
Even supermajor Chevron (CVX - Free Report) - carrying a Zacks Rank #2 (Buy) - is slashing production in the Permian Basin. The sharp decline in the oil rig count over the past few weeks, which currently sits at its lowest since 2009, also points to a near-term slowdown in domestic output.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Will the Rally Fade?
While oil prices have almost doubled in just three months, traders remain worried about the future direction of the commodity. In particular, crude is being pressured by the second wave of coronavirus infections. As several U.S. states experience a spike in new coronavirus infections and hospitalization, there are apprehensions that the country was perhaps premature in re-opening its economy. Resurgence in cases of the deadly pandemic could lead to another lockdown with many businesses forced to close again just after reopening. Moreover, this would create doubts around the trajectory of oil’s demand recovery. As it is, domestic supplies are now at their highest level on record.
In a nutshell, there is still too much supply but little (though improving) demand, suggesting that a sustained move over $40 might be difficult.
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 8 stocks to watch. The report is only available for a limited time.
See 8 breakthrough stocks now>>