Bjørnar Tonhaugen of Rystad Energy discusses what could potentially happen to oil prices when the U.S. and the world is projected to run out of viable physical storage capacity, potentially sometime in May.
Oil alternated between gains and losses in a volatile trading session that at one point saw U.S. crude drop more than 20%. Traders continue to eye dwindling storage capacity worldwide, although some of the losses were offset by optimism around reopening of economies.
West Texas Intermediate futures for June delivery fell 44 cents, or 3.4%, to settle at $12.34 per barrel, while international benchmark Brent crude gained 47 cents, or 2.35%, to settle at $20.46. Earlier WTI had been down more than 20%, touching a session low of $10.07, while also trading as high as $13.69.
Bjornar Tonhaugen, head of oil markets at Rystad Energy, said that oil moved off its lows on optimism about economies reopening.
“A ramp up in business activity will give a boost in US domestic oil demand, which can postpone filling the country’s oil storage a bit further in the future,” he told CNBC in an email. But he was quick to caution that demand will continue to stay depressed.
“US reopening industrial activity can give a temporary boost to prices as traders need space to breath, but we don’t expect the levels to last. Oil prices will likely average at 20 USD per barrel in the second quarter, with the lowest levels coming sometime in May,” he added.
On Monday, WTI fell 24.56%, or $4.16, to settle at $12.78 per barrel. Brent crude fell 6.76% to settle at $19.99. Each contract is coming off its eighth week of losses in nine weeks.
As demand drops more and more producers have announced production cuts. But some believe it won’t be fast enough to combat the unprecedented fall-off in demand from the pandemic.
Earlier in April, OPEC and its oil-producing allies agreed to a record production cut that will take 9.7 million barrels per day off the market beginning Friday, while Exxon and Chevron are among the U.S.-based companies that have scaled back operations.
“Despite the forthcoming OPEC+ production cuts, more production needs to be cut – particularly in the US and Canada to avoid tank tops by June,” S&P Global Platts’ global head of analysis Chris Midgley told CNBC in an email.
Last week the International Monetary Fund said that the global economy is expected to shrink by 3% this year, which Midgley said will lead to slower recovery in demand for oil.
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