Return of Car Traffic Fuels Surge in Oil

Source: By Amrith Ramkumar, Wall Street Journal • Posted: Wednesday, May 20, 2020

Demand for gasoline is on the mend around the world, supporting crude

Factory activity in China is boosting fuel consumption as economic growth in the world’s largest consumer of raw materials returns to normal. Photo: Agence France-Presse/Getty Images

As more lockdown measures imposed to halt the spread of the coronavirus pandemic are eased around the world, some investors predict a long-term increase in oil prices. The turnaround is a boon to the beaten-down energy industry and underscores investors’ hopes for a global economic recovery. Oil tends to rally when more people are traveling, factories are operating and ships laden with goods are moving around the world, trends that also often boost stock prices.

The S&P 500 rose Monday to a two-month high, led by a 7.6% rebound in energy stocks, which mirrored gains in crude prices. The broad equity index fell 1% Tuesday with U.S. crude-oil prices still rallying.

“As we see transportation demand recover and the globe reopening, that will help the oil price gradually grind higher,” said Rob Thummel, a senior portfolio manager who manages energy assets at the investment firm Tortoise. “We’ve still got a long way to go.”

With another gain Tuesday, the most heavily traded U.S. crude-oil futures contracts have risen to $31.96 a barrel after hitting a low of $11.57 last month. Prices started the year above $60. Brent crude futures, the global gauge of oil prices, have rebounded to $34.65.

Oil’s recent gains come with investors wagering on brighter days ahead for the world economy. Those hopes are pushing up other commodities sensitive to growth such as copper and aluminum and supporting Treasury yields. Yields rise when bond prices fall and tend to climb when investors are anticipating a pickup in growth and inflation.

Underpinning those bets is an uptick in movement by consumers around the world. U.S. motor gasoline supplied by energy companies, a proxy for demand from drivers, rose nearly 40% in the three-week period ended May 8, according to government data. Demand for distillate fuel including diesel—commonly used by trucks, trains and boats—is also climbing, though jet-fuel consumption remains weak.

Real-time gasoline demand indicators such as daily requests for driving directions on Apple Inc.’s Maps app also show a recent surge.

President Trump touted the energy rally with a tweet on Monday, saying “OIL (ENERGY) IS BACK!!!!” He recently called for higher prices to support the energy industry, and the U.S. was instrumental in the completion of a globally coordinated supply cut last month.

Hedge funds and other speculative investors are positioning for a long-term rebound. They recently pushed net bets on higher U.S. crude prices to their highest level since September 2018, Commodity Futures Trading Commission data show.

Reinforcing that optimism is a drop in key stockpile hubs around the world. Inventories of crude oil in China have started to decline, and U.S. stockpiles fell during the week ended May 8 for the first time since January. They also dropped at a key hub in Cushing, Okla., fueling bets that the worst of the industry’s storage crisis has passed. For much of April, traders were struggling to find available storage, and ships carrying oil were floating at sea with nowhere to go.

Those trends are starting to reverse. While U.S. stockpiles are still near a record hit in March 2017, traders say tumbling supply will likely prevent them from reaching their maximum capacity moving forward. The number of rigs drilling for oil and gas in the U.S. is at a record low in data going back to 1991 and less than half of what it was at the start of the year, data from Baker Hughes show.

“We believe the historic and prolific oil production growth by U.S. shale may have been forever altered,” EOG Chief Executive William Thomas said on the company’s earnings call earlier this month. EOG has closed wells and cut spending in response to what Mr. Thomas called “an unprecedented downturn.”

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Saudi Arabia, the world’s largest crude exporter, recently said it would cut supply to the lowest level since 2002 next month. The output cut goes beyond record-setting global supply reductions that were part of the deal producers reached last month. That agreement ended a production dispute between the kingdom and Russia that raised output even as demand crashed earlier in the year.

While oil’s decline forced large suppliers to compromise, investors said rising prices might push producers to start boosting output. Analysts are looking ahead to a meeting of the Organization of the Petroleum Exporting Countries and allies scheduled for next month for signs the group will extend recent supply cuts.

For now, suppliers remain focused on supporting the market, particularly given the fragile outlook for fuel demand.

The coronavirus pandemic has stalled factories and shut down business around the world, causing a historic drop in oil demand just as production was reaching new highs. WSJ explains the oil price bust that could reshape energy markets. Photo illustration: Carlos Waters/WSJ

“It’s still a complete crisis,” said Regina Mayor, who leads KPMG LLP’s energy practice. “We can’t get overly excited about $30.”

Oil’s bounceback is also a reflection of shifts in the market’s structure after April’s chaos. One price for U.S. crude oil fell below zero a barrel for the first time ever on April 20, with investors desperate to avoid being stuck with actual oil.

The turmoil drove changes to products including the U.S. Oil Fund, the largest exchange-traded fund tied to crude. The fund and others like it now hold futures for oil to be delivered several months from now rather than near-dated futures that can go haywire around expiration. Front-month U.S. crude futures for June delivery expired without any apparent issues on Tuesday.

Traders said the shift has instilled more confidence in the crude market, reinforcing the nascent optimism about the recovery in demand.

“We are in a ‘buy the dip’ oil market” as investors use any price drops as buying opportunities, said Gary Ross, chief executive of Black Gold Investors LLC and founder of consulting firm PIRA Energy Group.

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Write to Amrith Ramkumar at amrith.ramkumar@wsj.com