Oil markets have surged. Demand is up. Supply has tightened. Around the same time last month, it was a blood bath. Now markets are somewhat buoyant. A complete turnaround, indeed.

Yet, the question remains; is it sustainable?

A number of factors have contributed. Countries are opening up. Traffic on the streets has gone up. Lockdown and restrictions are being lifted in a number of countries. People have begun commuting, though mostly to their work places. Many continue to avoid public transport and are using cars, to avoid contact with others – as much as possible. The fear factor is still holding up.

This ‘increase’ in demand has impacted the crude market prices. But is it really a demand build up? Economies had to open up, one day or the other. They could not have stayed closed forever. And once open, crude consumption levels had to go up. Everyone knew that. Yet the fact is that global consumption is not back to pre-pandemic levels. People continue to be cautious.

In reality, this is not a demand build up. This is catching up on the lost demand – and only to an extent – while a ‘new normal’ is being carved out.

In the meantime, global crude supplies have gone down - and by a margin. The Organisation of the Petroleum Exporting Countries (Opec) led by Saudi Arabia and its non-Opec partners led by Russia, continue to tighten taps. With extreme political pressure exerted on Saudi Arabia to cut supplies, Riyadh is shouldering the lion’s share of the cuts. Further, it has just been announced that output from the Saudi-Kuwait neutral zone, shared equally by both the countries, would also be halted for a month from June 1. That would be taking out somewhere between 300,000 to half a million barrels per day from the global output.

Involuntary output cuts from the world’s largest producer, the United States is also contributing significantly to the balancing act. In fact, American oil production is dwindling much faster and deeper than analysts initially thought.

The EIA’s estimate of Weekly US Field Production of Crude Oil (and condensate), for the week ending on the 15 May 2020, shows the production of 11.5 million barrels per day, a reduction of 1.6m bpd since the estimated peak production of 13.1m bpd reported for the week ending 13 March 2020.

According to OIlprice.com, the US and Canada appear to have lost somewhere between 3.5 and 4.5m bpd of crude oil and condensate from oil production shut-ins. In North Dakota, more than 7,000 wells have been closed, shutting down 950,000 bpd of oil and condensate production.

So quick has been the pullback in US output that American producers are now one of the biggest helpers of the Opec+ coalition (to which they are not a party) to reduce global oil supply, Julian Lee said in a Bloomberg opinion piece.

Yet there is a flip side to the story too. There is but a growing echo, that increasing prices could reignite the shale revolution. Shale has the capacity to spoil the party by restarting shut-in production or completing wells, the moment prices rise high enough, says Forbes. “There’s a double risk on the horizon: Just as lifting lockdowns too soon could bring a second spike in virus infections and deaths, loosening the hard-fought restraint in oil production too soon risks a second oil-price collapse,” Lee emphasises.

The US shale needs to move slowly to sustain the market trends, some hence argue. The price of oil is now 80 per cent higher than it was in mid-April. Bullish sentiment, however, raises another question – will producers be tempted by rising crude oil prices to disregard quotas within Opec+? Will US shale resume drilling activity sooner than the market needs it, asks Tsvetana Paraskova while writing for Oilprice.com. Some could be tempted.

There is also speculation that once markets stabilise, the price war between the two crude giants, Russia and Saudi Arabia may restart. “Once the price returns to $50-55, I would not exclude that the struggle for markets will reignite,” Tass quoted Alexander Gryaznov, Director of S&P Global Ratings in Russia as saying.

Markets have taken a sigh of relief for now, but is it sustainable, and if yes, for how long, is still under the hammer. Fundamentals continue to be weak and as Ellen R. Wald says, sentiments, hope, and headlines are driving oil market exuberance.

Published in Dawn, May 24th, 2020