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Oil Up 88% in May: What Fueled Crude's Record-Setting Month?

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U.S. oil prices posted a gain of more than 88% for May - the largest monthly increase on record. Crude for July delivery rose $1.78, or 5.3%, to settle at $35.49 a barrel on the New York Mercantile Exchange on Friday. For the month, prices surged 88.4%, the highest since the contract’s inception in 1983. The stunning rally follows an unprecedented decline in April when WTI crude futures fell to an all-time low and even went negative for a while, as the coronavirus pandemic destroyed demand amid ramped up production.

Here are four key reasons for the resurgence:

OPEC+ Production Cuts: 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. In fact, the OPEC+ group pumped 24.77 million barrels per day in May, a Reuters survey showed, down 5.91 million barrels per day from April. The May total is the lowest in two decades.  

Rising Demand: The coronavirus pandemic decimated fuel consumption worldwide as curbs on travel and commerce to stem the contagion stalled economies. At the peak of demand loss in late March and early April, fuel usage tumbled roughly 30%. However, there have been signs of modest recovery in gasoline (and therefore, crude) demand on renewed economic activity and easing of lockdown restrictions. So much so that 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.    

Shale Retreat: Recent U.S. government data has been supportive in terms of U.S. producers scaling back operations. Weekly figures show output has dropped to 11.4 million barrels per day, since reaching 13.1 million in the second week of March. In particular, output from United States’ number one basin – Permian - is set to fall by 87,000 bbl/d month over month to 4.3 MMbbl/d in June – the second month of decline. Permian-based energy producers like Diamondback Energy (FANG - Free Report) , Cimarex Energy (XEC - Free Report) , EOG Resources (EOG - Free Report) , Parsley Energy (PE - Free Report) , Concho Resources (CXO - Free Report) and Pioneer Natural Resources (PXD - Free Report) are all going to invest a lot less money into the unconventional play in 2020. Even supermajor ExxonMobil (XOM - Free Report) - carrying a Zacks Rank #2 (Buy) - is slashing production in the Permian Basin. The sharp decline in the oil rig count over the past few weeks, which currently sits at its lowest since 2009, also points to a near-term slowdown in domestic output.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Continuation of Phase 1 Trade Deal: Investors are growing increasingly wary about the impact of renewed flare-ups between the U.S. and China over the later’s plan to impose new security legislation on Hong Kong. The deteriorating relations between the world’s two largest energy consumers cast a pall over the nascent oil recovery. However, oil prices soared by more than 5% on Friday after it was confirmed that President Trump would continue with the Phase 1 trade agreement with Beijing.    

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