Oil Rises to Five-Month High on Signals of Economic Recovery

(Bloomberg) -- Oil jumped to a five-month high alongside a surge in U.S. equities as optimism that an economic recovery may be on the horizon lifted hopes for improving fuel demand to follow.

Equities in the U.S., Europe and Asia strengthened on Monday, with the S&P 500 Index approaching the highest in months, bolstered by fresh stimulus out of China’s central bank. A gauge of builder sentiment in the U.S. jumped to its highest since 1998, signaling a bright spot in an economy reeling from the coronavirus pandemic.

Further helping buoy sentiment, there are signs that some parts of the U.S. hardest hit by the outbreak may be improving, with Florida announcing the fewest new cases since June and Arizona reporting the smallest increase in new infections in two months.

Rising homebuilder sentiment and the recovery in the stock market are contributing to “a general feeling that the economic times aren’t as bad as originally anticipated,” said Gary Cunningham, director of market research at Tradition Energy. “Optimism around the economic recovery” is translating to hopes for higher crude demand.

Meanwhile, a panel of technical experts is reviewing the deal between the Organization of Petroleum Exporting Countries and its allies on Monday, followed by a ministerial meeting on Wednesday. The group is starting to return some crude supply to the market this month following deep reductions.

U.S. benchmark crude futures are up almost 7% so far this month as inventories shrink and the virus crimps domestic shale operations. Crude output at major U.S. shale plays is expected to fall 19,000 barrels a day in September to 7.56 million barrels a day, according to the Energy Information Administration’s monthly Drilling Productivity Report. That comes as a string of energy companies file for bankruptcy protection in the wake of the pandemic, with oil driller Chaparral Energy Inc. among the latest examples.

“While prices have sharply recovered, we still see substantial challenges ahead for the shale patch,” such as limited financing and increasing cost of capital for shale plays, TD Securities commodity strategists including Bart Melek said in a note. “This should bode well for prices as demand growth continues to normalize into 2021.”

Oil’s rally remains capped by the surge in coronavirus cases around the world that has depressed demand. The sale of diesel in India -- the country’s most-used fuel and a proxy for its economic health -- slumped 20% in the first half of August from the same period in July.

With the pandemic crippling consumption for gasoline and diesel during the normally active summer driving season, refiners on the U.S. Gulf Coast are cutting run rates or considering whether to restart certain process units after maintenance in response. Calcasieu Refining idled its entire Lake Charles refinery in southwest Louisiana and may keep it shut for the rest of the year unless product demand improves. Exxon Mobil Corp. also idled a key process unit at its Baton Rouge, Louisiana, refinery due to weak demand.

OPEC+ is planning to return about 1.5 million barrels a day to the market this month after trimming roughly 10% of global supply following a crash in demand due to the pandemic. Iraq has also made its strongest commitment yet to implement deep output cuts, including deeper cuts in the coming months to compensate for missing previous targets.

OPEC+ sees overall implementation of its pledged production cuts in July of 95%, before the meeting of the group’s Joint Technical Committee to formally assess compliance, said delegates.

“Unlike at the July JMMC when the market was waiting for guidance on an extension of the deepest of supply cuts to August, at this meeting there is no supply policy determination to make,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA. “We expect the committee to reinforce the same message of compliance and group discipline as it did at the July meeting.”

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