Market Overview

Oil prices for the Brent crude benchmark extracted in the North Sea moved above the technical resistance of $42 per barrel today. It happened for the first time since June 10, and the prices are now approaching the three-month peaks that were seen immediately after the summer extension of the global deal by most of the exporting countries.

From the stock markets side, commodity prices are partially supported by the moderate positive sentiment both in the U.S. and Europe, although without a wild bullish rush, but also without an explicit urge for deeper corrections. Mr Yi Gang, who is the Governor of the People's Bank of China (PBoC) declared on Thursday that China’s economic fundamentals remain sound to the extent, when the regulator considers the timely withdrawal of its stimulative policy tools in advance. “The financial support during the epidemic response period is (being) phased, we should pay attention to the hangover of the policy,” Yi Gang said. He clearly mentioned that the economy has been recovering steadily after shrinking 6.8% in the first quarter, which is not such a large number if compared with many other developed countries.

At the same time, China will keep liquidity at an ample size in the second half of the year as new loans are likely to hit nearly 20 trillion Yuan ($2.83 trillion) this year, up from a record 16.81 trillion Yuan in 2019. Total social financing could increase by more than 30 trillion Yuan, the governor said. The bank’s balance sheet remains stable around 36 trillion Yuan. A balanced policy supports the Chinese manufacturers, which means it indirectly sponsors the continuing replenishment of oil reserves of country's enterprises which still has relatively cheap fuel. While giving out monetary support with both hands, officials verbally signal that the economy will continue to recover at a good pace, while also giving unwitting support to the prices.

It is noteworthy to mention that Brent prices moved into backwardation on Thursday for the first time since early March with the August contract rising to nine cents above September LCOc1-LCOc2 on Friday. Backwardation is a kind of market paradox, which occurs when near-term contracts are trading at higher prices than outer months’ contracts. This may indicate an increased demand at the moment, and therefore a possible readiness for further price growth. Before that, worries about storage capacity had sent the market into steep contango, as wide as $5. Contango market structure means the vice-versa situation when outer months’ trade are at higher prices than the nearest contracts. This previous contango situation meant that investors believed in low prices at that moment, and higher prices were not expected any time soon. And now the situation has changed for the better, but of course, no one knows how long this will last.

CMC Markets chief strategist Michael McCarthy pointed to a fundamental resistance point in the WTI contracts between $40 and $41, as he supposed more US shale producers may revive shut-in wells with higher price levels. The Baker Hughes oil rig count dropped from 682 in the beginning of March to the current 199 units, and updated American shale industry statistics will be released today at 17:00 GMT. The active rig count acts as a leading indicator of demand for oil products, and the better the market situation, the more rigs are functioning. But as the number of units increase, an oversupply maybe caused, naturally limiting fuel prices.

Assessments of the situation by member countries of the OPEC+, which is the informal group of The Organisation of the Petroleum Exporting Countries (OPEC) and its allies, may vary. On Thursday, a panel of the OPEC+ group representatives left the door open for extending or easing existing cuts after July, while pressing a number of countries to improve their compliance of the deal. In particular, the commitment of Iraq and Kazakhstan to make up for overproduction in May on their supply cuts in the following months supported the market. Kirill Dmitriev, head of The Russian Direct Investment Fund (RDIF), which is a major state sovereign wealth investment fund in the country, just told RBC Daily newspaper in Moscow that: "With global economies and oil demand recovering, there is no point in extending oil output cuts led by OPEC and other producers. We already see that economies have started to emerge from the coronavirus and markets are recovering, supporting oil demand, so there is no point to extend strict curbs for longer than a month (through July)."

But it would be too unambiguous to assume that such statements clearly play on the negative side of the oil market. Indeed, the more export volumes removed from the market, the less supply exceeds demand, but the excessive willingness of exporters to sacrifice their production levels could also be a sign of market weakness. The readiness of some countries to face the question head-on and to gradually increase production quotas indicates normalisation. OPEC and its allies are currently cutting output by a record 9.7 million bpd, and that is as much as 10% of the global supply. They did this after oil demand plunged by up to a third at the bottom point. Current plans of oil exporters include the step-by-step decline of the cuts, at first to 7.7 million bpd from August, staying at that level until the end of 2020.

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