Oil edged higher as signs of a recovery in demand continued to surface following the easing of virus-led lockdowns in some regions, while Saudi Arabia pledged to cut production further.
Futures rose 1% in New York after falling Monday. Pockets of fuel demand are starting to emerge in India and China, and while a huge glut remains, global stockpile builds are starting to slow. Saudi Arabia announced a surprise move to deepen daily output cuts by another 1 million barrels, which was followed by smaller reductions from OPEC allies the United Arab Emirates and Kuwait.
Oil is still down about 60% this year with little clarity over when global consumption will be back to pre-virus levels. China has seen a steady recovery in air travel and traffic in its capital city, but in Europe various degrees of lock-down continue to hobble consumption. In the U.S., an OPIS report showed that the volume of fuel sold by retailers across the nation rose just over 7% in the week ended May 2. However, the rebound is still far below 2019 levels.
Crude fell Monday amid doubts over Saudi Arabia’s ability to implement the extra cuts, while some suggested the move was indicative of the market’s underlying weakness. There are also concerns a resurgence of coronavirus cases may lead tightening restrictions and a further hit to demand.
“It doesn’t take much of a demand slip to push inventories to the danger of being at full capacity,” said Michael McCarthy, chief market strategist at CMC Markets Asia Pacific. “Production cuts will address that over the medium term, but what happens in the short term is the worry. There is an argument that oil is trading above its equilibrium prices.”
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Indian fuel consumption in May is expected to be as much as 25% higher than April as planting season begins, requiring tractors and water pumps to burn more diesel, while trucks return to the road as lockdown restrictions ease, according officials at two state-owned refineries. In China, more people are driving to avoid public transport due to virus fears, boosting gasoline demand.
Saudi Arabia aims to pump just under 7.5 million barrels a day in June, compared with an official target of about 8.5 million a day. It’s a sign of the urgency in Riyadh to stabilize the market as rock-bottom prices force the kingdom to impose deep spending cuts. Kuwait and the U.A.E. followed by announcing additional daily curbs of 80,000 barrels and 100,000, respectively.
Saudi Aramco’s first quarter earnings on Tuesday will give an insight into how much the price crash has affected the business so far, although there won’t be a conference call or management presentation for analysts or the press.