From negative value to bull market spot market recovery oil price is undergoing a big reversal

 From negative value to bull market spot market recovery oil price is undergoing a big reversal

Javier Blas points out that traders in London now come together every day to consider whether to buy North Sea oil. But just two months ago, every trader wanted to sell, and no one was keen to buy. This window is the place where the most powerful trading institutions play games, which will affect the pricing of Brent crude oil. At present, this window has become a bull market. The ratio of buying to selling is 10 to 1, and the price is soaring.

The spot market is very strong, said Ben lucock, CO head of oil trading at Trafigura group, the worlds largest independent oil trader

As shown in the figure below, Brent crude oil has more than doubled since April.

Before that, the oil market experienced a rough period. First, the outbreak weakened oil demand and shattered the alliance between Saudi Arabia and Russia. Then, the epidemic spread around the world, and the deadly price war between Saudi Arabia and Russia pushed the market to the brink of disaster. Just as the epidemic subsided, the collapse of the oil market brought competitors back together to cut production the most on record. The recovery in the oil spot market is driving a surge in the much larger Wall Street oil futures market (traded on the London and New York exchanges).

WTI crude oil futures rose to more than $40 a barrel on Friday, the opposite of two months ago. At that time, WTI crude oil futures fell to a negative value for the first time as the oil storage tank was about to be filled, which shocked the market.

In addition, the Brent crude oil price curve also shows that the international market has changed. Last week, there was a so-called spot premium in oil distribution futures, that is, the price of crude oil for spot delivery was higher than that for forward contracts. This situation is a clear sign that refiners, whose demand for products disappeared during the blockade, are now willing to pay high prices to ensure that their facilities are supplied.

You can see oil demand rising every week, said Marco dunand, co-founder of mercuria Energy Group Ltd

Official data show that Chinas oil consumption has now returned to the level before the outbreak. Oil demand is still declining in countries severely affected by the epidemic, such as Italy and Spain, but is rapidly recovering in other countries, including India, Japan, France and Germany.

Our short-term tracking of demand confirms that oil demand has recovered healthily from its April low, said Giovanni serio, chief economist at Vitol group The company estimates that oil demand increased by about 1.4 million barrels a week in June, roughly equivalent to the amount of oil consumed in the UK each week.

The risk of the second outbreak depends on the fate of different petroleum products

However, the market is not completely out of the woods. In many countries, the spread of the first wave is still accelerating, and some countries have to take strict measures to avoid the spread of the second wave.

The epidemic continues to have an impact on daily life, which can be seen in the uneven rebound of different petroleum products. Gasoline prices are leading the economic rebound as people choose to drive and avoid public transport. For the first time since the outbreak, the immediate delivery price of gasoline in the US wholesale market has been higher than that of forward contracts, indicating strong demand.

We think there will be a V-shaped recovery in gasoline prices, said Chris Midgley, former head of market analysis at Royal Dutch Shell Diesel fuel, however, is more closely linked to the business cycle because it powers industry and freight, but it lagged as the global economy plunged into recession. Demand for jet fuel is almost as low as it was at the height of the crisis.

OPEC + launched a historic production reduction, and the oil market is expected to return to balance

The sharp cut in OPEC production means that even if the global economy is weak, its crude oil consumption may be roughly the same as current production. This is a huge shift from March to may, when traders put about a billion barrels of excess oil into tanks, underground oil depots and even ocean tankers.

If OPEC + tries to make every country comply with its production quotas, and demand continues to rise, the world may soon start consuming more oil than it produces.

Last week, Saudi energy minister Prince Abdulaziz bin Salman said at the OPEC ministerial meeting: the signs of recovery in demand and rebalancing of the global oil market are encouraging. The world economy has embarked on a long journey of relaxing the blockade, but setbacks and reversals are inevitable.

Reducing too much inventory tends to be a catalyst for rising oil prices, but it can be a slow process. Additional demand can also be easily met by timely supply - a combination of OPEC and US shale production recovery.

Few traders expect oil prices to reach $50 a barrel this year. However, fewer people believe that oil prices will return to the ultra-low level in April, when the oil distribution price even fell to $15.98 per barrel.

(daily chart of Brent crude oil price)