Oil Futures Advance as Signs of Economic Recovery Offset Virus

(Bloomberg) -- Oil rebounded from a weekly loss as better-than-estimated economic data countered fears that Covid-19’s resurgence will crimp fuel demand.

Futures in New York and London closed higher after declining for two out of the last three weeks. Prices followed equities higher as U.S. pending home sales posted a record gain, signaling that America’s economic recovery is underway. Yet the outlook remains uncertain.

“The economic data continues to improve,” said John Kilduff, a partner at Again Capital. The release of China manufacturing data Tuesday, as well as the potential for increased travel during the U.S. July 4 holiday, could turn the next few days into “a make-or-break-it week for oil prices.”

Still, the overall market picture is bearish. Crude stockpiles in the U.S. are at record highs, worldwide consumption remains a long way off pre-virus levels and many refiners are struggling with low margins. In another indication that supplies are plentiful, WTI and Brent crude for prompt delivery are trading at discounts to later dated contacts in a market structure known as contango.

New clusters of coronavirus infections across the U.S. South and Southwest have states including Texas reversing or slowing reopening plans. Domestic fuel consumption dropped 2.3% Saturday from the same day the week prior.

“We have a demand problem,” said Bill O’Grady, chief market strategist at Confluence Investment Management LLC. Unless U.S. inventories decline, West Texas Intermediate crude could plunge, he said. “I wouldn’t be shocked to see us retest the low $30s.”

While American gasoline demand has gradually improved, diesel inventories have expanded for 11 out of the last 12 weeks, suggesting that industrial activity has a long road to recovery.

“The product inventory problem may be the most bearish factor out there,” said O’Grady. “If you look at the demand for distillate, it’s terrible, and distillate is what drives the economy,” he said.

The market has been getting support from efforts by the OPEC+ alliance to restrict production. Iraq -- a habitual laggard in the group’s supply cuts -- is reassessing contracts to pump crude at fields where costs are high as it tries to contain expenses while curbing production, in a sign of the commitment to ease a global glut.

Separately, China’s state-owned refining giants are in talks to form a joint purchasing group to buy crude, a move that has the potential to alter the balance of power between sellers and buyers in the oil market. That could increase the Asian nation’s bargaining power and avoiding bidding wars.

©2020 Bloomberg L.P.