1.1369592-1015117739
Flame coming off perdido oil rig in gulf of Mexico. Oil prices closed on a third straight weekly high on Friday as prices continued to rally on economies reopening from their COVID-19 lockdowns. Image Credit: Agency

Abu Dhabi: Oil prices closed on a third straight weekly high on Friday as prices continued to rally on economies reopening from their COVID-19 lockdowns.

Brent was up at $32.50 on Friday’s trading, with West Texas Intermediate (WTI) on $29.43, as both benchmarks kept up their sustained rallies on positive market sentiment and hopes of oil prices having bottomed out during the end of April, which saw WTI going negative.

“Oil prices extended their recovery for a third week running as sentiment toward demand improves as more countries ease their lockdown conditions and allow for economic life to return to something approximating pre-coronavirus conditions,” said Edward Bell, commodity analyst at Emirates NBD.

“For the month of May alone the improvement in oil futures has been dramatic: Brent has gained nearly 30% while WTI is up by around 56%. June WTI futures expire this week but the relative improvement in sentiment toward crude and easing concerns over whether storage was reaching tank tops should prevent a repeat of last month’s hysteria when expiring futures moved into negative prices for the first time ever,” he added.

Production cuts play their part

Also assisting with the continued price recovery have been the production cuts that came into affect from the start of this month according to Ole Hansen, head of commodity strategy at Saxo Bank, as the worst case scenario of storage facilities reaching full oil capacity having been averted for now.

“Crude oil continues to push higher and in hindsight the short-lived collapse to a negative WTI price last month probably saved the market and set in motion the recovery currently seen.

“Major producers around the world, potentially faced with heightened risk of tank tops and the price collapse spreading, stepped up their efforts to cut production. A development which together with a pick-up in demand was highlighted by the International Energy Agency in their latest oil market report as key reasons for the recovery seen during the past month,” he added.

The IEA in their May outlook report revised their global demand numbers, with demand set to go down by 8.6 million barrels per day (bpd) this year, from an earlier estimate of 9.3 million bpd.

Despite the current momentum in oil prices, Hansen cautioned that the recovery could be short lived as overall demand was still down compared to pre-pandemic levels.

“With estimates that demand may not fully recover for at least another year, we suspect that the current recovery may eventually run out of steam.

“Also considering the risk that U.S. shale oil producers, some desperate to survive, will be able to restart shut-in production as the price reaches economically viable levels above $30/b,” he added.

Markets are rebalancing

Speaking at Adnoc’s virtual majlis last week, Dr Sultan Ahmad Al Jaber, UAE Minister of State and Group CEO of Adnoc, said signs were pointing to an oil market that was rebalancing itself.

“When it comes to oil, there are signs that the market has tightened in recent weeks. The Opec+ agreement, voluntary cuts outside Opec-plus plus, and production shut-ins are working together to start to rebalance the market.

“This will take time. As economies begin to open up, demand will follow, but the path to the next normal is not a straight line,” he added.

Al Jaber also highlighted how Adnoc was well positioned to handle the current downward in prices thanks to its low cost production.

“Through our transformation, we have focused on what we can control and that is our costs. We’ve been laser-focused on being one of the lowest-cost producers in the world,” he said.

“This has given us the flexibility and the resilience that we need at times like these. In this environment, we are continuing to work even harder to preserve our resources, and maximise our profitability,” Al Jaber added.