Oil Rallies On Signs Of A Global Reopening

Oil prices rose early on Wednesday on a spate of relatively positive news.

The most obvious for the oil market was the smaller-than-expected build in crude inventories reported by API. Crude storage rose by 10.6 million barrels instead of the more than 13 million barrels expected, perhaps a sign that the glut is a bit less extreme than expected. Oil jumped on the news.

More importantly, there was some hopeful progress on the pandemic front. Gilead Sciences said on Wednesday that its preliminary trials of antiviral drug remdesivir showed some evidence of helping patients with COVID-19 recover faster. Meanwhile, Pfizer said that it may have a vaccine available for emergency use by the fall. That came two days after researchers from Oxford University also said that they may be able to develop a vaccine before the year is out.

Experts have repeatedly said that a vaccine could be 12 to 18 months away, perhaps even longer, so the claims of a faster timeline are hopeful.

Financial stocks and oil prices rallied on the news. WTI was up 25 percent on the news by Wednesday morning.

Meanwhile, countries and some parts of the U.S. are already beginning to lift travel restrictions. Lifting travel restrictions has gone against medical advice in some cases, but regardless, the markets see higher oil demand coming from those decisions.

"Such a development could indeed bring some oil demand back, but not that much for the hardest-hit road fuels yet as travel restrictions remain," Bjornar Tonhaugen, head of oil markets at Rystad Energy said in a statement. "Again, intentions are not actions yet, but they are enough to get trading going, as market participants do not want to miss the positive sentiment in case these hopes materialize."

After weeks of dismal news, oil markets seemed to be eyeing a better-than-expected future. But there is a long way to go. Opening economies too soon could lead to a spike of new coronavirus cases, potentially forcing another shut down. Related: Brent Oil Price Could Double By December

A second wave of the coronavirus later this year is "inevitable," Dr. Anthony Fauci said on Wednesday. How the U.S. is able to handle this depends on preparation. "If by that time we have put into place all of the countermeasures that you need to address this, we should do reasonably well," Dr. Fauci said. "If we don't do that successfully, we could be in for a bad fall and a bad winter." That statement applies both to the spread of the virus and the revival of the economy, as the two are inextricably linked.

The damage done to oil demand may not recover quickly. "The US Energy Information Administration (EIA) and the International Energy Agency (IEA) project global demand will be back at only 2% below 2019 levels in Q4 2020," Bjarne Schieldrop, chief commodities analyst at SEB, said in a report. "That sounds overly optimistic to us."

In the short run, the oil industry has to navigate the next few weeks, which is widely expected to result in extreme supply shut ins. With oil demand down roughly 30 percent in April, and perhaps by slightly less in May, storage is set to be overwhelmed. Supply needs to align with demand, and the process will be chaotic. Goldman Sachs said that by mid-May, storage could be mostly tapped out, which could require 18 million barrels per day (mb/d) - 20 percent of global supply - to be shut in.

U.S. shale is set to see steep declines. The rig count has already collapsed by nearly 50 percent in the span of just a few weeks. "Permian activity is now less than half that needed to offset declines; we estimate Permian oil liquids output will fall 1.08mb/d (23%) by year-end at current activity levels," Standard Chartered wrote in a recent report.

By Nick Cunningham of Oilprice.com

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