After every extensive sell-off, there is a relief rally and this is exactly what we are experiencing in oil prices. The
front end (June) contracts for Crude and Brent have rallied and the oil prices are trying to win the investor
community’s confidence back. However, it will take a very long time for that to happen, especially after the massive
damage that the negative prices have done. Whenever you will look at an oil contract, it will always remind us of the
possibility of negative prices.
Nonetheless, the extreme contango conditions that we experienced earlier this week have eased off to some extent, and
this has also taken the pressure off from oil sensitive currencies.
The fact that the EIA data (released yesterday—the number showed more surplus of oil) failed to push the prices lower
was a clear sign that all the bad news is already priced in, and a relief rally is on its way. This mean-reversion rally
can push the prices up by another few percentages.
In terms of crude oil’s front-month contract, the price is up more than 145% from its low of $6.50, but the prices are
still down over 39% since the massive sell-off (when crude oil’ June contract fell from 25 dollar level). For now, it is
immensely difficult for the prices to climb back above the $20mark, especially for the June contract.
However, if the price does cross the $20 mark, and stays above that mark, then we will be out of the woods. The question
is how that can happen?
Well, for starter, the global economic lockdown is going to ease off next month and it is a positive sentiment that will
triumph the supply glut concerns. Investors will pay more attention to the good news--life returning to normality rather
than the excessive supply.
On the fundamental side, the real reason that we have seen the oil prices moving higher is mainly due to two factors.
Firstly, it is the tweet of the US president that has escalated the tensions between the US and Iran after he cleared
the US military to attack the Iranian boats if they harass the US navy ship—according to Trump that is harassment, many
may disagree with his definition of harassment. Secondly, there is a real possibility of substantial production cut from
the US oil producers as they are likely to be paid to keep oil underground. This payment will be in the name of saving
the US shale oil industry.
The bottom line, that there is no doubt in saying that oil prices have been hit the most and there was a real discount
especially in the front-end contracts, but the question is if the rally in front months is going to push the prices
higher for later month contracts. This can only happen if investors become more optimistic about oil prices.