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4 Reasons Why U.S. Oil Prices Moved 9% Higher on May 14

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Oil prices rose 9% on Thursday, with WTI crude futures hitting a nearly six-week high. The U.S. benchmark gained $2.27 to end at $27.56 a barrel on the New York Mercantile Exchange. Prices marked their highest finish since Apr 3.

Here are the factors that led to the surge in oil price:

IEA’s Encouraging Commentary: The International Energy Agency’s (‘IEA’s) latest Oil Market Report revised up its growth estimates for 2020 global oil demand. The Paris-based organization now projects crude consumption to fall 8.6 million barrels per day to 91.2 million barrels per day in 2020. This represents 790,000 barrels per day lower demand loss compared with last month’s report. The agency credited easing lockdown measures for the improving demand outlook.

Deliberate Supply Tightening by OPEC+: Member countries of the OPEC+ group, looking to shore up prices, have started to withhold output by almost 10 million barrels per day – the largest in history – from May 1. The collective cuts are in response to the unprecedented slump in demand due to the coronavirus outbreak, which led to crude’s downward spiral. Per the agreement, Saudi Arabia (the OPEC cartel’s biggest producer and exporter) is committed to reducing oil production by 4 million barrels a day from an April baseline. Riyadh recently pledged an additional 1 million barrels per day in cuts from next month.  

Supportive U.S. Government Data: The U.S. Energy Department's latest inventory release revealed the first decline in domestic crude supplies in 16 weeks. Per the report for the week ending May 8, crude inventories fell by 745,000 barrels, versus expectations for a 4.8 million barrels increase. Oil supplies at the Cushing, Oklahoma, delivery hub fell too. Further, gasoline stocks tallied a larger-than-expected decrease, while distillate inventories rose but the quantum of increase was less than what the market had been looking for. Meanwhile, the country’s crude output has fallen to 11.6 barrels per day, down from 11.9 barrels per day in the previous week. Top U.S. shale producers including Pioneer Natural Resources Company (PXD - Free Report) , EOG Resources (EOG - Free Report) , Occidental Petroleum (OXY - Free Report) to oil majors ExxonMobil (XOM - Free Report) and Chevron (CVX - Free Report) have all slashed production.

Upbeat Tone by BP, Goldman Sachs: European supermajor BP plc (BP - Free Report) portrayed a bullish picture on the demand environment. The London-based company, carrying a Zacks Rank #3 (Hold), said that it has seen oil consumption ‘surge back’ this week as vehicles return to roads with the relaxing of shutdowns and production cuts ramp up.

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Further, U.S. banking giant Goldman Sachs’ (GS - Free Report) commodities unit recently suggested that crude’s worst losses are in the rear view mirror with signs of gradual rebalancing. In fact, the leading investment management firm raised its global oil usage prediction for May by 1.4 million barrels per day and expects the market to flip into deficit in June.    

Where are prices headed?

The bullish data points notwithstanding, investors still remain worried of the supply glut. In total, U.S. commercial stockpiles have risen by more than 75 million barrels since the week ending Mar 20. Further, domestic fuel demand remains abysmally weak, refinery utilization in the United States is close to its lowest level ever, while Cushing oil storage tanks are more than 80% full. As a proof of the demand destruction, EIA estimates U.S. oil consumption in 2020  to plunge by 2.2 million barrels per day to 18.29 million barrels per day. This implies that oil prices are unlikely to trade much higher from current levels.

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