By Barani Krishnan
Investing.com - The rumbling on the Street is that oil has hit bottom and can only go up, and industry data due later today, along with the government’s weekly report slated for Wednesday, are expected to show that.
But even before those numbers, U.S. crude has made a run toward $25 a barrel after a vote of confidence on oil from Morgan Stanley (NYSE:MS), which said “the greatest mismatch in supply/demand is probably behind us”. Cross-street rival Goldman Sachs (NYSE:GS) said after market hours on Friday that it anticipated “a three-stage oil price rally, from relief, to cyclical tightening, and finally structural repricing”.
Oil prices have virtually doubled in just a week.
New York-traded West Texas Intermediate settled up $4.17, or 20.5%, at $24.56 per barrel, after hitting $24.84 earlier — the closest it has come to the $25 mark since April 9.
London-traded Brent, the global benchmark for oil, rose $3.77, or 14%, to $30.57. It hit $30.90 at the session peak, its highest since April 14. $30.97.
Despite the run-up, oil is still way below where it began the year, with WTI down 60% from its December 2019 close of $61.06, while Brent trades 53% down from last year’s finish of $66.
Indeed, the Wall Street powerhouses that have adopted a more favorable outlook for oil since the start of this week do not see an easy path ahead.
“The rebalancing will likely be drawn out and have its fits-and-starts,” Morgan Stanley said.
Goldman Sachs was just as cautionary.
“Beyond this relief rally, we caution that the oil bull market that we forecast will take time and require patience,” it said. “Oil remains a physical asset and will, therefore, need to first price to clear the substantial inventory overhang through 2H20, leaving the commodity to lag the rally in related anticipatory financial assets like equities.”
Even so, the contango, or negative difference, in the front-month of both WTI and Brent were markedly lower than their immediate sucessive contracts, making the risk of holding prompt oil not as bad as a few weeks ago, when investors were practically fleeing the market or buying only in farther-dated contracts to store oil for later delivery. WTI’s front-month contango was just about $2 on Tuesday. It was 10-times as much two weeks ago.
“The WTI contango has narrowed and is not anymore in a super-contango situation that allows storing anywhere (tank cars etc..),” said Olivier Jakob, founder of Swiss oil risk consultancy PetroMatrix. “The disappearance of the super-contango in WTI reduces the risk of holding flat price length through a contract roll, and that is providing some support to the flat price of crude oil. That makes a big difference.”
Tuesday’s rally in oil came ahead of the snapshot on U.S. crude, gasoline and distillate stockpiles for the week ended May 1. The American Petroleum Institute will issue its measure at 4:30 PM ET. Attention will also be on API's measure of inventories at Cushing, Okla., the storage hub for expiring WTI contracts that deliver physical barrels.
Fear that Cushing will run out of space to store oil was what drove WTI’s expiring May contract two weeks ago to its first-ever negative pricing in 37 years.
The Cushing number will also be in the government’s Weekly Petroleum Status Report, which will be released at 10:30 AM on Wednesday. For the previous week to April 25, the EIA said Cushing inventories rose by 3.7 million barrels last week, reaching 63.4 million in total. Cushing’s capacity was 76 million barrels, the EIA had said previously.
But ahead of the weekly EIA data, energy intelligence firm Genscape said on Monday that Cushing builds just amounted to 1.8 million barrels last week — just about half of the previous week’s 3.7 million.
That boosted the market’s confidence that the storage hub might not hit limit at its current growth rate, especially with gasoline and distillate consumption expected to rise as well hereon as most of the 50 U.S. states reopen for business after a six-week shutdown for the pandemic.
Traders expect the EIA to report a crude stockpile growth of 8.1 million barrels last week, versus an increase of 9 million barrels during the week ended April 25.
Gasoline stockpiles are expected to have risen by 325,000 barrels, versus a previous drawdown of 3.7 million barrels.
Distillates inventories are forecast to have grown by almost 3 million barrels, after a 5 million barrel rise the week before.