Cypto miners are expected to benefit from lower oil prices. Photo: AFP

Oil markets started the week on an optimistic upswing, with prices for both global oil benchmark Brent crude and US benchmark West Texas Intermediate (WTI) rising to their highest prices in over two months.

On Monday, Brent futures for July delivery rose some US$2.31, or 7.1%, to settle at US$34.81 a barrel, while WTI crude increased a healthy US$2.39, or 8.1%, to close at US$31.82. On Tuesday both rose again but at clipped pace.

Both benchmarks’ ascent comes after the worst month in the history of oil markets, a reflection of the demand-destroying devastation caused by the Covid-19 pandemic. Global demand was at 30 million barrels per day (bpd) in April, less than one-third of the 99.5 million bpd consumed over the same period in 2019.

Adding insult to injury, on April 20, the last day of the WTI May contract, prices plunged to a market shocking -$37.63 per barrel. In essence, holders of the contract paid that day to have the once precious black commodity taken off of their hands.

Now, a month removed from that seismic event, June WTI crude futures contract hit $32.50, surging over 10% on Monday and Tuesday to close the session.

The turnaround comes amid the partial reopening of several virus-hit nations, including the US, the world’s largest economy. However, the specter of a dreaded second wave of the pandemic looms over markets, which would undo previous positive developments and price moves.

For the time being, upward price support is also coming from news last week that Saudi Arabia extended its oil production cut obligations above the most recent OPEC+ deal, with Riyadh pledging to shave another 1 million bpd worth of production.

A huge jet of flame bursting from an oil platform lights up the sky in a file photo. Photo: AFP

OPEC+ has already made steep oil production cuts per its deal reached in April to trim an historic 9.7 million bpd of production in order to shore up market prices. However, most analysts don’t expect the full 9.7 million bpd worth of agreed to cuts to actually be met.

Markets are also pricing in positive news from drug maker Moderna and its ongoing apparently successful trials of a Covid-19 vaccine, the first to be tested in the US.

However, even if phase three of the company’s tests are encouraging and the drug is approved, market an actual vaccine would not be available on a mass scale until early 2021, according to company CEO Stephane Bancel.

Perhaps the most intriguing part of the global oil supply equation is not coming from the Middle East, nor even China, whose April oil imports rebounded from the previous two months to a healthy 9.84 million bpd, according to customs data.

Arguably, the most robust factor for oil markets now comes from the US. Though the country is prohibited by law from engaging in any production cut deals or so-called price fixing, much to the dismay of OPEC kingpin Saudi Arabia, a number of US oil players including heavyweights ConocoPhillips, Continental Resources and Chevron are taking matters into their own hands.

They are all shutting down production in order to first dry up the severe ongoing supply overhang that is rapidly filling up storage levels, and to give upward support for beleaguered prices.

Workers stand on the platform of a fracking rig in the Permian Basin oilfield on January 21, 2016 in the oil town of Midland, Texas. Photo: AFP / Spencer Platt / Getty Images

Yet despite the recent uptick, oil prices will remain well below US shale producers’ production break even points – the price that they need to turn a profit.

“With oil around $30, US shale remains under pressure and we expect further bankruptcy filings as smaller companies struggle to service debt,” Chris Midgley, head of analytics at commodities data provider S&P Global Platts, said in emailed comments to media.

On May 18, Baker Hughes said that active oil rigs in the US fell by 34 to 258 in the most recent reporting week – a record low for the second week running and its lowest since 2009 during the height of the global financial crisis.

Natural gas rigs fell by one to 79, a record low according to data going back to the year 1987.

US oil rig shutdowns will reduce domestic production by at least 616,000 bpd in May and 655,000 bpd in June, more than three times the size of reductions seen in April, consultancy Rystad Energy said last week.

There are several take-aways from US producers shutting in production. First, it will cause the US to lose its spot as the top global oil producer, first to Russia and then possibly the second slot to Saudi Arabia, the world’s largest oil exporter.

US oil producers will also lose recently gained market share at the expense of OPEC members and Russia, especially in the lucrative Asia-Pacific region.

The US took the top production slot in 2018 and held the lead in 2019, averaging some 12.23 million bpd last year. Russia followed at 10.85 million bpd, and Saudi Arabia at 9.82 million bpd for the year.

An oil rig in Russia. Photo: AFP

OPEC member Iraq was the fourth largest oil producer last year at 4.61 million bpd, with Canada rounding out the top five at 4.40 million bpd, according to US Energy Information Administration (EIA) data.

So far this year, the US is still the top producer, but last month started to pare down its lead. EIA data shows production at 12.2 million bpd for the third week of April, a whopping 900,000 bpd less than its record peak of 13.1 million bpd in March.

Going forward, as US producers shut down wells and as a plethora of smaller and mid-sized producers are forced out of business, production declines will continue. During the first two weeks of May, as much as 1.5 million in production had been slashed by US producers.

Rystad said that production shut-ins in the US will reach at least 2 million bpd in June, including natural gas liquids (NGLs), with Permian-focused producers in West Texas and New Mexico contributing around 42% of the expected reductions.

The cut in production, including in both planned and forced production, will eventually have a long term affect on supply that may be hard to imagine in the current Covid-19 season of record low oil prices, demand destruction and company bankruptcies.