Has the Oil Market Already 'Turned a Corner'?

Analysts are predicting light at the end of the tunnel for the energy industry, with Swiss-based commodity trading company Mercuria Energy Group observing early signs of growth. The COVID-19 pandemic, coupled with massive production cuts from OPEC, sent shockwaves through the energy market. Now, Mercuria is forecasting a recovery.

Emerging out of contango

Oil prices are currently conforming to a pricing structure called contango, which means commodities futures prices are higher than the spot prices. Contango usually indicates a surplus, with traders capitalising on the situation to purchase oil at low prices and store it until the market picks up. By the end of April, the contango for Brent oil futures had dropped from over US$3 a barrel to US$1.50. This meant that for many sellers, it was more profitable to store oil on ships and pay demurrage fees, rather than sell it at such a low price.

Moving forward, Mercuria Energy Group CEO Marco Dunand predicts the trend will continue. “We may see some kind of reverse in the next two or three months and the big contango on Dated Brent will probably disappear,” says Dunand. “Fundamentals are shifting a little bit. We believe in the months of June, July and August ... if OPEC respects its agreement with non-OPEC, people with the most expensive contango will have to start selling.”

China set to spearhead recovery

With COVID-19 lockdowns around the world starting to ease, the expectation is that oil demand will start to pick up. There are also hopes OPEC and its allies will agree to more output cuts which would help to stabilise prices. Many analysts say China will play a critical role in spearheading the oil price recovery. When the Chinese economy shut down at the height of the coronavirus pandemic, oil demand slumped. Now, Chinese consumption has recovered to around 90% of its pre COVID-19 levels. Other major oil consumers like the United States and India are also showing signs of revival, which indicates a price recovery could be on the horizon.

“The brisk resumption of Chinese oil demand, 90 percent of pre-COVID levels by the end of April and moving higher, is a welcome signpost for the global economy,” says Jim Burkhard, head of research for crude oil markets, and energy and mobility at IHS Markit. “When you consider that oil demand in China - the first country impacted by the virus - had fallen by more than 40% in February - the degree to which it is snapping back offers reason for some optimism about economic and demand recovery trends in other markets such as Europe and North America,” adds Burkhard.

India and US drive demand

Indian Oil Minister Dharmendra Pradhan is also hopefully, predicting national demand will recover to pre-coronavirus levels by June. In the United States, gasoline prices are on the rise and fuel consumption recently spiked by 7%, according to the AAA.

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