Oil prices settled down for a second straight day, unable to hold on to Thursday’s early run-up inspired by a hike in the official selling price of Saudi crude.
The market’s abrupt turn, especially U.S. crude’s return to under $25 per barrel after decisively breaking that resistance for a second day in a row, indicates that not all’s well with the more than week-long oil rally.
“I reiterate that we’ve gone up too much too fast and I think that beginning to dawn on others too,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. “This market is obviously front-running the ‘Reopen America!” theme but the fact remains that more than 30 million Americans are out of a job and we need better data that demand is back to support a market that’s up 100% in a week.”
June WTI, the benchmark for U.S. crude, settled down 44 cents, or 1.8%, at $23.55 per barrel, after reaching a one-month high of $26.73 at the session high. WTI has virtually doubled since hitting a bottom of $12.34 on April 28, though it remains down more than 60% on the year.
London-traded Brent, the global benchmark for oil, settle.d46 down 26 cents, or 1%, at $29. It reached $31.84 earlier. Brent has risen 50% in the past eight sessions but remains down 55% on the year.
Crude prices rallied earlier on Thursday after Reuters reported that Aramco (SE:2222), the state oil giant of Saudi Arabia, has raised by $1.40 a barrel the official selling price, or OSP, of its June Arab light crude to Asia.
While the flagship Arab crude grade remains at a significant discount of $5.90 per barrel to the competing Oman/Dubai average, the price hike wasn’t in line with market expectations. Asian refiners had instead banked on the kingdom to provide buyers in the region an even better carrot in June, just as it has done since March, as refining margins continue to suffer from the coronavirus crisis.
Scott Shelton, energy futures broker at ICAP (LON:NXGN) in Durham, N.C, said, commenting on oil’s early rally on Thursday he was “still not a believer in the flat price oil ‘up here’ story, (although) WTI is the cheapest barrel to run now”.
Crude’s remarkable rebound from the lows of last week, powered by optimism over the reopening of business in most of America’s 50 states after a six-week lockdown imposed over the Covid-19, had caught oil bears napping.
Yet, the market isn’t out of the woods, given the existential oversupply of tens of millions of barrels at sea, as well as in land-based storage facilities for oil.
Traders are keeping a close watch on nuanced flows in the physical market to see how closely those are aligned to the futures.
The Plains all-American Pipeline, a reference source for physical oil, quotes physical WTI at $20 per barrel, versus its April 28 quote of $8.25. That indicates that the physical market is broadly keeping up with the action in futures.
Even so, June WTI remains at a discount of at least 20% to physical barrels. While that may be typical, it’s a worry under the present circumstance, given both have to converge when June WTI expires in less than two weeks. Massive difference between the physical and futures markets was what accelerated WTI’s plunge into historic sub-zero prices when the May WTI expired two weeks ago.
Traders will also be keeping a close watch on shipping numbers out of OPEC, the United States — and particularly Russia — to check their adherence to the so-called GLOPEC deal’s commitment to remove at least 9.7 million barrels daily from the market from this month.