According to a report from Stratas Advisors, crude prices found additional foundation in the first week of June from stronger fundamentals. This development arose thanks to OPEC and its allies, who decided to extend the cuts agreed last April for one month more. The 9.7 million b/d cuts were to end originally in June, but it was decided to extend them to end of July, before implementing the second phase from August to December. Although supportive for oil prices in the short term, this situation exacerbates the diverging picture that had been developing over the preceding six weeks: crude prices were recovering quicker and stronger than product prices, which is placing downward pressure and will structurally affect the refining environment as long as COVID-19 is around and refined products demand does not fully recover. Gasoline and diesel prices need to rely on transportation, manufacturing, and other sectors recovering from the pandemic, and this process is running at a different speed for products than for crude markets.
This diverging pace is taking a toll on refining margins around the globe. Over the last five weeks virtually every configuration and region in the world is experiencing low margins. Refiners will ultimately need to reduce utilization rates and this adjustment will trickle down into less crude barrels nominated for upcoming cargoes. Stratas sees crude prices continuing to see support based on the OPEC+ agreement and a better-than expected May U.S. unemployment report, despite the misclassification caveat, which provides a positive short-term outlook. Given the size of the price recovery over the previous four weeks it is also reasonable to expect participants in the futures contracts running a profit-taking spree, which could briefly impact spot prices, but the overall context looks strong this week for crude prices.
Global Supply—Positive
All routes on the crude supply map look positive for prices, from declining number of rigs in the United States, to OPEC+ cuts—even if compliance percentages of some members are expected to vary significantly – and additional reports of declining supply around the world.
A major short-term event associated with crude supply that could dampen support for prices would be a weekly report from the EIA that provides evidence of a U.S. production plateau. We do not expect to see this take place this week, but the possibility will increase over the next few weeks because of stronger crude prices and that reported US crude production declines have been decelerating.
Geopolitics—Neutral
Despite lingering tensions between the United Stated and China and the potential implications for global economic growth, the name of the game this week is global cooperation, showcased by the OPEC+ agreement, so the Geopolitical factor for this week is neutral.
Economy—Positive
The surprising U.S. employment report issued last Friday is poised to cast a positive shadow that will extend for this week as well, as it provides hope of an oil demand recovery, mainly on transportation and manufacturing sectors. The report had a caveat: it was originally reported that the U.S. economy had generated 2.5 million jobs during May, but due to a classification concept of how unpaid jobs are accounted, in reality unemployment rate hovers 16 percent rather than 13 percent. But since the consensus was to see the unemployment rate close to 20 percent this May number is nevertheless more positive than originally expected.
In the global context, the U.S. dollar has been losing value when compared to other currencies because of monetary policies being employed by the Fed. A weaker dollar in general is positive for crude prices because barrels sold in USD become “cheaper” for international buyers.
Oil Demand—Neutral
U.S. consumption patterns were expected to start returning to normal, after most States have resumed activities over the last two weeks. But the resulting impact on demand has been counterintuitive and unstable to say the least. Just last week it was reported that US consumption declined 4 percent over the prior week – which included Memorial Day, a historical milestone for summer driving season- whereas distillates demand was lower by a whopping 17 percent.
The expectation that pent-up demand would help to rebalance product stocks will need more time to come to fruition. The uptick in gasoline demand associated with the traditional driving season will be muted because a percentage of the population will drive less than normal with ongoing concerns about visiting hotels, amusement parks or other public places. A similar picture is developing globally, with relaxation of restrictions having a positive impact for job recovery but is taking longer to have the same impact on the oil demand. Consequently, the net weight of Oil Demand is expected to be neutral for this week.
Oil Trader Sentiment—Negative
The most immediate reaction from the trading community to the OPEC+ agreement is expected to be positive, but this same week will see profit taking, on the heels of the crude price rally seen for several weeks now. The net impact for this week will be negative for future prices and especially with respect to the WTI contract, which has reached an unprecedented advantage over ICE Brent with regards to the Managed Money net. Commercial participants on the NYMEX Light Sweet Contract are slightly leaning toward being short, which highlights the dynamic pace of the US fundamentals correction, whereas Non-Commercial participants continue to be long, in expectations of a long-term recovery.