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Is This Oil Rally Justified?

U.S. West Texas Intermediate crude oil futures are in a position to close higher for a second consecutive week on Friday as more countries moved forward with plans to ease economic and social restrictions put in place to halt the coronavirus pandemic and as more output was reduced.

Nearby WTI crude oil and international-benchmark Brent crude oil are heading for the second week of gains after hitting what looks like a major low in April, when U.S. oil crashed below $0.00, with WTI up about 20% this week and Brent advancing close to 12%.

Despite the near-term strength, crude oil is still being pumped into storage, creating the possibility that any gains prompted by strong demand will be limited. Essentially, the market remains extremely oversupplied, but OPEC+ production cuts and other voluntary curtailments may be starting to have an impact on supply. Furthermore, the easing of economic restrictions could start to show the modest beginnings of demand recovery, but there is still a long way to go before the devastating demand destruction is erased.

Supply Side: Production Cuts Begin

The Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, a group known as OPEC+, began implementing a deal on record supply cuts amounting to 9.7 million barrels per day (bpd) from the start of May.

Meanwhile, North American oil companies are cutting production quicker than OPEC officials and industry analysts expected and are on track to…





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