By Peter Nurse
Investing.com - Oil prices posted strong gains Monday, with investors confident that production cuts and the loosening of social distancing requirements will continue to push the supply/demand back towards normalcy.
At 8:20 AM ET (1220 GMT), U.S. crude futures traded 8.8% higher at $32.13 a barrel, climbing to a two-month high, while the international benchmark Brent contract rose 6.5% to $34.61, touching its best level since March.
Helping gains was a report by Energy Intelligence Monday that the Organization of Petroleum Exporting Countries and its allies, a group called OPEC+, may extend the cuts it agreed earlier this spring to the rest of the year.
Saudi Arabia, Russia and other members of the alliance recently started implementing the largest ever coordinated production cut, to the tune of 9.7 million barrels a day in May and June.
These cuts are designed to be gradually reduced in the second half of this year and then through to April 2021, but the report suggests that the maximum level of cuts may be continued throughout 2020.
It’s not only the OPEC+ members that have been cutting supply. Baker Hughes data on Friday continued to show a collapse in U.S. drilling activity, with the number of active oil rigs in the U.S. falling by 34 over the week, to total 258. Total oil rigs are now down more than 62% since mid-March, and at levels last seen in 2009.
Adding to the positivity is the number of countries worldwide that are in the process of lifting the strict lockdowns on their populations, allowing the potential for more travel. Several U.S. states are also lifting restrictions - Georgia, South Carolina, and Montana had eased restrictions as of May 15 and others including Texas, Maine, and Illinois have partially reopened.
With this in mind, Seevol.com predicts a 5.49 million-barrel draw in inventories in Cushing, Oklahoma, the delivery point for West Texas Intermediate crude when the official numbers are released Wednesday.
Ahead of that, investors will keep a wary eye on Tuesday’s expiry of the WTI June contract given the turmoil last month, which included a trip into negative prices territory as long positions were hurriedly liquidated to avoid having to take physical delivery.
“There’s clearly a different feel to the oil market heading into this contract expiry, with production cuts having been enforced globally, either through deals or unilaterally," Craig Erlam, senior market analyst at OANDA, told Reuters.