Oil Price Jumps As Lockdown Eases and Supplies Tightened
The coronavirus pandemic has left some devastating effects on the global stock market, especially with oil stocks. We all know, oil is the lifeblood of industrialized nations. When we think of oil, we think of its vast applications. Oil supplies energy for power production, heats homes, and provides fuel for transportation. But it is not just those. To oil exporting nations, the lockdown of countries on a global scale is the worst nightmare they could possibly imagine.
One main source of income is suddenly pulled back in a big way; as demand for oil came to a complete halt. When we first heard about the “new virus” back in January, no one predicted that it would be a pandemic. There was also no way to determine the effects it has had on the oil market.
Crude oil prices have made a come-back after skidding into negative territory last month. By now, we all know the May contract plunged nearly 300% to settle at negative $37.63 a barrel. Can you believe that? Someone is willing to pay to take the oil off other’s people’s hands. This has certainly never happened in modern history.
Oil Prices Recovery To Benefit Oil & Oil Stocks
Oil investors are becoming increasingly optimistic after Saudi Arabia reported it would cut another 1 million barrels per day in June.
The actions taken by members of OPEC and other major producers to curb production of oil have helped to stem the flood of crude oil.
Furthermore, the production is also falling as energy firms in the US cut the number of oil and natural gas rigs operating to at all time low for a second consecutive week.
As many would recall, US rigs tend to have higher production costs compared to those in the Middle East.
Nevertheless, the partial economic resumption we are seeing in the U.S. is signalling that the demand for oil is about to pick up.
“Oil prices may show further upside momentum as the easing in mobility restrictions grows,” said Stephen Innes, chief global market strategist at AxiCorp in a note, referring to curbs that were designed to counter the coronavirus.
When oil price recovers, oil stocks are usually the quickest to follow with gains. Despite certain states and countries easing lockdown measures, it seems investors are still wary of investing in airlines or transportation stocks just yet.
After all, some investors might have mistaken an increase in oil prices as a reflection of the resumption in economic activities. Right now, we are seeing an increase in oil prices because supply has been tightened.
As for investors hoping to have a full economic recovery, we have to be patient. Until we have a vaccine which is expected only in 2021 or later, we won’t see oil prices back at 2019 levels anytime soon.
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China’s Daily Throughput Rebounds
The catalysts behind the surge are the collective efforts of OPEC countries and major producers, and also the increased demand from China.
Oil futures continued to march on after a report showed China’s daily crude oil throughput rebounded in April.
Refineries have increased their operations to meet renewed fuel demand. They have also started to buy more oil. This came after the easing of lockdown previously imposed to contain the coronavirus.
We can see the volume of cars on the roads in Hong Kong and mainland China have been going back to near-normal levels.
The gradual easing of lockdown measures in certain parts of Europe and the U.S. are signaling that the resumption of demand for oil is right around the corner.
As much as I would like to see the world returning to normal, investors have to be cautious. We never know if there will be a second wave of coronavirus cases and deaths. If that happens, oil prices may dip again.