Return to the Road Drives Oil Price to Largest Ever Monthly Gain -- Update
June 01 2020 - 3:45PM
Dow Jones News
By Ryan Dezember
U.S. oil prices notched their largest monthly gains on record in
May, recovering a big chunk of the losses caused in March and April
when the country went into lockdown to counter the spread of the
coronavirus.
All that unburned fuel swamped refineries and storage facilities
and sent oil prices into negative territory for the first time.
Since the start of May, though, domestic inventories have been
drawn down sharply as producers choked back output and drivers
returned to the road.
After dipping below $0 for the first time ever, West Texas
Intermediate futures ended April at $18.84 a barrel. In May, the
U.S. oil benchmark added $16.65, or 88%, to end at $35.49. In both
dollar terms and percentage gain, it was the best month for West
Texas Intermediate since the futures contract began trading in
1983.
Futures were little changed Monday, with July deliveries losing
0.1% to settle at $35.44 a barrel. Brent crude, the international
benchmark, added 1.3% to close at $38.32.
Traders are weighing not just the return of fuel demand and
domestic production cuts but also the fraught China-U.S. trade
negotiations, civil unrest in the U.S. and whether the Organization
of the Petroleum Exporting Countries and allied oil-producing
countries will extend their April curtailment pact.
Saudi Arabia-led OPEC and its market allies, including Russia,
are scheduled to hold a videoconference on Thursday to talk about
extending their coordinated output cuts.
"The Saudis want to keep production cuts in place for the
remainder of summer, but as the rest of the world reopens, someone
is going to want to grab that demand," said Edward Moya, senior
market analyst for trading firm Oanda.
From the pandemic's onset, gasoline consumption plunged 48% to
the lowest levels in at least 30 years. Demand has climbed about
halfway back as shelter-in-place policies were eased around the
country. During the week ended May 22, daily consumption of
gasoline was about 7.3 million barrels, 16% lower than the same
time a year earlier, according to U.S. Energy Information
Administration data.
Meanwhile, U.S. oil companies have choked back their output and
shut in wells in response to prices that had fallen below the cost
of production. Daily output during the week ended May 22 was 11.4
million barrels, down from a record of 13.1 million in
mid-March.
The cuts might not get much deeper. BofA Securities analysts
estimate that the volume of shut-in production peaked last month at
2.5 million barrels a day in the U.S. and Canada.
"Since many of these plans were unveiled, oil prices have
strengthened to levels where shutting-in no longer makes sense and
should actually encourage producers to quickly restore production,"
the analysts wrote Monday in a note to clients. "We expect June
curtailments, particularly in the U.S., to be a fraction of the
previously announced levels."
Still, they and other analysts expect that the sharp budget cuts
announced by oil companies will remain largely intact and will lead
to a decline in production as fewer wells are drilled to replace
naturally declining output of shale wells.
That should help reduce the surplus of oil in storage that
builds up during the first half of the year, said Deutsche Bank AG
analyst Michael Hsueh, who boosted his forecast for year-end U.S.
oil prices to $37 a barrel, up from $32. For Brent, the price that
many exported barrels fetch, Mr. Hsueh now expects $40 at the end
of the year, up from his earlier prediction of $35.
Write to Ryan Dezember at ryan.dezember@wsj.com
(END) Dow Jones Newswires
June 01, 2020 15:30 ET (19:30 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.