The event on April 20 sent a shock-wave through the global oil market with producers realizing that something dramatic had to be done in order to rescue the market from even more pain. This probably led to the very strong and rapid compliance that major producers have been exhibiting so far this month.
In their latest monthly Oil Market Report the International Energy Agency saw global supply drop by 12 million barrels/day in May to reach a nine-year low at 88 million. Demand meanwhile was expected to recover from being down 22 million barrels/day year-on-year in May to down 13 million in June.
Supporting the process has been the rapid and in most cases involuntary reduction in US shale oil production, now estimated by the IEA to reach 2.8 million barrels/day year-on-year in 2020. Previous production cuts by OPEC+ always attracted some level of hesitancy as members of the group risked yielding further market share to producers in North America. That risk evaporated with the slump in WTI as it left many producers out of pocket, thereby forcing them to halt production.
Having potentially reached the consolidation phase it is worth considering what could trigger a renewed sell-off. There are several risks with the most relevant being:
- Easing lockdowns sparking a resurgence of Covid-19 outbreaks
- Can OPEC+ maintain the current high level of compliance
- Cash strapped US producers desperate to increase production with WTI back above $30/b
- Post-pandemic changes in global consumer habits (less flying and work from home)
Hedge funds through futures and retail investors (unfortunately) through futures-tracking ETFs, such as the much talked about USO, have been buyers for the past seven weeks. Especially the demand for WTI crude oil futures have been firm with the net-long during this time seeing a three-fold rise to a 20 month high. Hedge funds will maintain and add to this exposure as long the fundamental and not least technical outlook continue to support. But be aware of the potential risk of long liquidation should some of the above mentioned risks come to fruition.