Source: IG Charts
Oil Talking Points
The price of oil pulls back from the monthly high ($40.44) even though the Organization of the Petroleum Exporting Countries (OPEC) agree to extend the production cuts unveiled at the April meeting, but the ongoing contraction in US production may keep crude prices afloat as output narrows for ten consecutive weeks.
Fundamental Forecast for Oil: Neutral
The price of oil gives back the advance from the start of June as the Organization for Economic Co-operation and Development (OECD) warns that “all countries are projected to experience a deep recession in 2020 followed by a slow and gradual recovery in 2021,” and the economic shock from COVID-19 may continue to present headwinds for crude as US inventories unexpectedly increase 5720K in the week ending June 5 after contracting 2077K the week prior.
The threat of a protracted recovery may put pressure on OPEC and its allies to cap production throughout 2020, and the group may take further steps to rebalance the energy market as the most recent Monthly Oil Market Report (MOMR) warns that “in 2020, world oil demand growth isadjusted lower by 2.23 mb/d and is now forecast to drop by 9.07 mb/d.”
It remains to be seen if anything new will be announced at the next Joint Ministerial Monitoring Committee (JMMC) meeting on June 18 as the production cuts announced at the April meeting are set to expire at the end of July, and signs of growing stockpiles may undermine the recent recovery in the price of oil as OPEC continues to highlight the “surge in tanker demand, driven by low crude prices and a need to push out excess supplies amid concerns about the availability of onshore storage capacity.”
Nevertheless, the update from the US Energy Information Administration (EIA) showed field production of crude narrowing to 11,100K from 11,200K in the week ending May 29, and the response by oil producers may continue to stabilize the energy market as US output falls to its lowest level since October 2018.
With that said, the ongoing slowdown in global production may keep the price of oil afloat in June, but the gradual process of reopening the advanced economies may drag on crude prices amid the threat of a protracted recovery.
— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong