Oil prices are on the rise again as it appears that OPEC and Russia are poised to extend production cuts. The big question mark, as usual, is Russia, with what seems to be uncertainty about how long they want to extend cuts. They say they will wait until Tuesday to make a decision. Mexico may also be a problem, yet it is clear that if OPEC plus wants to see oil prices continue to rise, they should extend cuts.
Regardless, it appears that OPEC Plus will meet early on June 5th to iron out the details, and the market is betting they will extend cuts by at least one month until the end of July. Yet what is amazing in this market are signs of tightening supply globally. Brent crude is on track to test $40.00 and has now gone from contango to backwardation. That is signaling that the market has gone from oversupplied to undersupplied. Demand in Germany, along with China, has exceeded pre-coronavirus levels indicating that oil demand globally will be back in a big way and much faster than many people thought.
In the U.S. we get the American Petroleum Institute (API) report at 3.30p central time. Oil inventories have increased in recent weeks as Saudi oil takers are getting offloaded. That is masking the massive and historic pullback by U.S. shale and oil producers that could see the U.S. market tighten before you know it. U.S. rigs have fallen by 70% year over year.
The energy market also needs to keep an eye on the Atlantic. Tropical storms and hurricane risk are rising. With U.S. shale shutting down, hurricane risk premium in oil and natural gas could increase in a hurry.
Despite the many doom and gloom predictions about stocks and oil, we are acting strong. Even the unrest in the U.S. is failing to quell market optimism. Don’t fight the momentum.