Market Overview

As European shares are near three-month highs with the Euro Stoxx 50 and German Xetra Dax 30 composite indexes approaching the levels seen in early March, the market is following the "Make Europe Great Again" scenario.

European stocks are being supported not only from the continuing growth of US stock indices but also from some continental corporate news. For example, Lufthansa surged 7.5% after its supervisory board approved a nine billion Euro government bailout for the German largest airline, although later on it lost half of is gains during a trading session. Traders in Germany returned from a long weekend driving Volkswagen, Daimler and BMW shares that rose within a 4.5%-7.7% range on a Reuters report that the country's Ministry of Economics had proposed a five billion Euro buyer bonus scheme to boost car sales.

Futures on Wall Street are not under pressure now, but instead they are already rewriting their May peaks, moving up to 3075 on the S&P500 stock index today. It seems that most investors were encouraged by the news that US President Donald Trump is using the military force to halt protests over the death of an Afro-American man during a police incident. The ongoing riots in many American cities divide the country and are, perhaps, the only aggravating factor for market minds right now. After investors were noticeably reassured by Trump's decision to limit himself to only some measures against individual Chinese officials and gradually remove the most-favoured-nation regime only for Hong Kong without seriously affecting mainland China or imposing any tariffs on trade flows. The fact that the US authorities do not seek to revise the "Phase One" trade agreement in response to the escalating controversy supports the hopes of many in the market that, at least from this side, they should not expect a red herring.

Now, the growth of global markets on both sides of the Atlantic is boosting the further recovery of oil prices. A jump in prices on the Brent benchmark above $40 per barrel may look quite possible and realistic, but if it happens, what can be expected next? The oil market is still maintaining a pronounced positive mood since the beginning of the week. Prices are trying to develop further the momentum for growth which was received on Friday. Any possible decision on the extension of existing production cuts that is due to be discussed by the OPEC+ on June 4 may provide another nudge for crude prices. Technically, this upside pressure looks quite stable.

But at least for now oil prices keep moving higher, even though the psychological resistance area is quite critical for Brent futures. Such a resistance zone could be considered, perhaps, in the wide range of $37 to $40 per barrel since it was the invisible border of $37 per barrel that kept prices from further growth during the last days of May. On the other hand, prices have never dared to rise above the $39.70 mark since March 11. That is, literally from the date immediately after the collapse of The Organisation of the Petroleum Exporting Countries (OPEC) and other exporters deal and the subsequent fall to the $30 area. Brent futures then made a very short rebound to $39.70 in March, but everything above it was too attractive for numerous sellers. Crazy March sales continued just from the present price levels, and it all finished with surprising and almost impossible but real negative prices for Texas Crude WTI futures at the end of April.

This time, at the end of May, oil futures safely survived the expiration date and even gained a lot of support from the economic growth. Market players now are not in a hurry to sharply and thoughtlessly push oil prices back lower from these levels in these first days of June. Crude prices seem to be quietly "tolerated" at present levels and this significantly increases their chances of a new rapid surge to $40 per barrel or even higher. Another question is whether the surge will not beshort-lived, and whether the prices will be able to really consolidate the gains at least for some foreseeable time? The actual balance of supply, demand, production and inventories is still unstable. According to the US Energy Department, crude oil inventories again unexpectedly showed an increase of 7.93 million barrels after a decline of 4.98 million barrels a week earlier.

So, Friday's surge in oil prices was supported only by the information about an additional drop in the number of working shale rigs in the US to 222 units, which is 15 units less than they were a week ago. This is the lowest value of rig numbers from Baker Hughes in ten years: half the level of mid-April and almost three times less than the number of rigs before the coronavirus crisis. A kind of "bonus" for the oil prices also was an official confirmation that export volumes from Saudi Arabia in total decreased to 6.35 million bpd after the spring peak of 9.3 million bpd. However, it should be said that the average level of Saudi oil exports before the collapse of the OPEC and Co deal was usually only slightly higher, around 7.2 million bpd, that is shown below in Pic.1.

Pic 1. Saudi Arabia oil export volumes by months