Crude Prices Recovery May Continue in a Few Months Amid Expected Inventories Decline

Oil prices fell on Wednesday as an industry report showed a rise in crude and fuel inventories in the United States, renewing concerns about oversupply and slumping fuel demand in the world’s largest crude consumer. Brent crude futures fell 57 cents, or 1.4%, at $40.70 a barrel, after gaining nearly 1% on Tuesday. West Texas Intermediate (WTI) futures declined 68 cents, or 1.8%, to $38.37 a barrel, having risen about 2% in the previous session.

After the weekend’s OPEC decision brought some answers to the supply side investors are turning to demand concerns. International benchmark Brent crude futures were trading at $40.64 per barrel and West Texas Intermediate futures at $38.25 per barrel on Wednesday morning. Brent recovered almost 40% in the month of May, with current prices aided by a weaker Dollar, increased Chinese buying and lower funding costs. But, both contracts are still down around 35% year-to-date.

The Goldman Sachs Group, Inc. sees a correction in oil prices on the horizon even amid a significant recovery in the last month and the recent decision by OPEC and its allies to extend historically large production cuts through July. “With oil now above $40/bbl, supplies will be incentivized to return, but we believe the risks to the downside have increased substantially and are now looking for a 15-20% correction which may already be underway after Monday’s modest sell-off,” Goldman Sachs’ commodities research team led by Jeffrey Currie wrote in an analyst note on Tuesday.

Japanese bank MUFG meanwhile sees a similar forecast with Brent around $35 in the third quarter, but has more confidence in a demand recovery, looking at China’s activity ramp-up and its record oil import in May, up more than 13% from April. However, it sees the current rally as overshooting its near-term expectations, the bank is “more confident that the early stages of the reopening process can progress relatively smoothly, and with it, providing upside risks to our currently benign global oil demand expectations.”

“The deeper global economic recession that we now expect in 2020 in all major advanced economies and the drastic reduction in travel in particular have reduced demand for oil products beyond our previous assumptions,” Alexander Perjessy, a Moody’s vice president and senior analyst, wrote Tuesday. But Moody’s puts its medium-term oil price assumptions at $45 to $65 a barrel for Brent crude. Goldman sees Brent pulling back to $35 per barrel in the immediate weeks.

Norway-based Rystad Energy expects prices to “continue fluctuating around the 40-dollar mark for the remainder of the month and until we have a more definite idea of how Covid-19 and U.S. production develop,” the firm wrote in a client email Tuesday. Also, crucial — how firmly OPEC+ members comply with their production cutting commitments.

Fuel demand has recovered from April’s collapse brought on by lockdowns to control the pandemic. Oil prices rose in May as global oil demand was higher than forecast and as adherence to announced production cuts by Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) was high. The monthly Brent prices expectation are averaged at $39/b during the second half of 2020 and may rise to an average of $48/b in 2021. The forecast of rising crude oil prices reflects expected declines in global oil inventories during the second half of 2020 and through 2021. We expect a high inventory levels and spare crude oil production capacity will limit upward price pressures in the coming months, but as inventories decline into 2021, those upward price pressures will increase.