Oil might skip the negative price bullet this time

Oil might evade another fall into negative territory thanks to the unexpected drop in US crude inventories, which sent the West Texas Intermediate crude benchmark up from $US26.62 ($41.35) per barrel late last week to the current $US30.68 per barrel.

This contrasts with the gradual decline in the WTI price in the leadup to the expiration of the futures contract for May in mid-April.

Besides the 745,000-barrel fall in US crude stockpiles to 531.5 million barrels in the week to May 8, there are also signs that demand is recovering with governments around the world slowly lifting travel restrictions.

Additionally, oil producers worldwide have slashed production, which has also started easing pressure on storage.

OANDA senior market analyst Craig Erlam told Reuters that there was a different feel to the oil market heading into the June contract expiry with production cuts being enforced globally, either through deals or unilaterally.

“But will it be enough to avert another panic selling moment? The odds have certainly reduced … there’s a fine line between confidence and complacency and we can only hope that line hasn’t been crossed,” he said.

US Federal Reserve chairman Jerome Powell has also provided some support, saying that if there is no second wave of COVID-19 infections, the economy should start to recover steadily through the second half of 2020.

However, any hopes that oil prices could recover substantially might be crushed by US shale oil producers.

Unlike the state dominated oil producers in OPEC and other countries, US shale oil players could curb gains in crude pricing by restarting shut-in production or completing wells as soon as they can.

The second half of the year will not be met with pre-crisis oil prices again as the gigantic oil stock overhang must first be worked down, according to Rystad Energy’s head of oil markets Bjornar Tonhaugen.

“We believe stocks will be reduced gradually over the next 12 months or so,” Tonhaugen said.

“All bets though hinge upon avoiding a second wave of the coronavirus, which is yet to be seen as countries remove lockdowns around the world.”

Brazilian state oil company Petrobras is more pessimistic, warning that the benchmark Brent crude would average just $US25 per barrel this year and rise by about $US5 per annum to about $US50 per barrel in 2025.

Brent crude is currently trading at $US33.54 per barrel.