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Wed 17 Jun 2020 05:49 PM

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Strong oil rally pauses but is cemented by burgeoning demand and short-term cuts

Oil markets have rallied hard since OPEC-led cuts came into effect and lockdown measures in numerous countries have been gradually lifted

Strong oil rally pauses but is cemented by burgeoning demand and short-term cuts

Hussein Sayed, chief market strategist at FXTM.

‘There are decades where nothing happens and there are weeks where decades happen,’ has certainly been an apposite phrase to use recently.

The fastest stock market collapse in history has been followed by the fastest recovery and the main US stock market index, the S&P500 briefly stood in positive territory at the start of this week.

It sounds quite incredible to write that after the economic upheaval we have experienced over the last few months.

Tumultuous, record-breaking times in financial markets hit another peak in the monthly US jobs report which revealed what is being called the biggest data surprise in history.  The non-farm payrolls headline number showed a rise of 2.5 million jobs in May against a consensus estimate of a 7.5 million fall.

The surprise was illustrated by the fact that none of the 70 economists surveyed by Bloomberg forecast a positive figure, with the highest estimate being -800k. A simply remarkable figure when one considers the slow pace of reopening and the fact that more than 12 million people filed a new unemployment claim during the time the survey was conducted.

This turnaround comes after a record number of job losses in April of over 20 million.

Improving labour markets bode well for oil demand and the seemingly positive nature of this report, one that often guides markets going forward, backs up the nascent signs of improvement that economies have been showing recently.

That said, we should remember one report does not make a summer and employment in the US is still 19.5 million lower than in February. The financial markets have also recently been reminded of the threat of a second wave of virus infections in both the US and China, which investors have feared for some time and has caused a jump in volatility.

Of course, the oil markets have rallied hard since OPEC-led cuts came into effect and lockdown measures in numerous countries have been gradually lifted.

Indeed, May was a stellar month for oil with US crude notching up its best month on record with a dizzying 88 percent rise. This historic bullish run has left oil bears battered while also undermining volatility and trading activity, with volumes down over 30 percent from April and the lowest this year.

Constructive news for Oil bulls has also come on the supply side with the OPEC+ alliance recently agreeing an extension of current output cuts through until the end of July. This will see July cuts of slightly less than was agreed for May and June, with Mexico unwilling to extend its current cuts.

Despite the apparent stabilisation, officials argue that an extension covering August could be required so bringing the need for more negotiations during the summer, especially as the chances increase of rising global supply later in the year. There have also been issues with full compliance that are to be monitored, with some countries having over-produced since 2019.

Overall, the improving oil balance serves as an incentive for non-OPEC+ producers to increase production, cue US shale companies to re-enter the fray.

The differences between Russia and Saudi Arabia may linger as highlighted by the recent short-term strategy, only hammered out after two weeks of negotiations.

OPEC appears to still be data dependent so any further rally in Oil prices will prove interesting for the group.

Hussein Sayed, chief market strategist at FXTM

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