One month ago, a benchmark oil price collapsed. Futures of West Texas Intermediate crude dropped to -$40.32, before leveling off at -$37.63., one day before its May contract expired. At the time, Goldman Sachs warned that storage space could completely run out within three to four weeks, and send the oil market into further disarray. This is about when the time when that would have happened, so it seems like an appropriate point to check in on the oil market.
As it turns out, there is some good news to be had. U.S. crude futures rose to $31.62 per barrel on Tuesday, and Brent crude rose to $34.65. Energy stocks rose by 7.6% on Monday, pulling the rest of the S&P up with it. The June WTI contract quietly expired on Tuesday, closing at $32.50 per barrel.
While prices are recovering it is not high enough for production to continue at its previous levels. Last week, the International Energy Agency announced that oil production is expected to fall by 12 million barrels per day this month. OPEC countries and Russia (OPEC+) agreed in April to cut oil production by 9.7 million barrels per day. Since then, Saudi Arabia has made additional voluntary cuts in an attempt to prop up prices. Meanwhile, production in the United States and Canada fell too. Active rig count shrank by 56% since March 17, according to Baker Hughes data. Active rigs fell to 339, the lowest number on record. Ironically, have fewer producers in play will help prop prices back up.
Demand is rising, too. People are beginning to drive again as lockdowns ease, which will help ease supply pressures. The gasoline supply in the United States rose by nearly 40% in the three weeks leading up to May 8th. Activity is increasing overseas as well – one example is factory activity is coming back online in China.
Falling supply coupled with rising demand is easing pressure on inventories. Storage space (or lack thereof) was widely reported last month. In particular, a distribution hub in Cushing, Oklahoma, and suppliers, having to get creative, began storing fresh product in ships at sea and in pipelines. Inventories fell during the week ending in May 8th for the first time since January, a welcome change.
Oil is not out of the woods yet, but these signs point to a hopeful recovery.