Oil prices rose again in early Friday (1/5). At 07.25 WIB, West Texas Intermediate (WTI) oil prices for June 2020 delivery on the New York Mercantile Exchange were at US $20.21/barrel, up 7.27% from the previous Thursday's US $18.84/barrel, has increased by US $3.78 or 25.1% from the previous session.

Brent crude for the July contract, which starts trading Friday, rose $1.10, or 4.2%, at $27.58 a barrel on the London ICE Futures Exchange. Brent rose 12% on Thursday. US crude for the June contract rose $1.37, or 7.3%, to $20.21 a barrel, after rising 25% in the previous session.

The increase in oil prices was driven by the introduction of global oil production cuts by OPEC + oil producers. Starting today, OPEC + reduced oil output by 10 million barrels per day, while other producers including Norway and ConocoPhillips also agreed to reduce production.

In addition, the increase in crude oil prices this week was also supported by US government data showing gasoline demand rose with the highest increase in the last year last week and fuel stockpiles shrank. There is currently a lower-than-expected rise in US crude oil inventories.

The US began to reduce production in an effort to offset the decline in fuel demand triggered by the coronavirus pandemic. The head of Market Strategy at AxiCorp Stephen Innes told Reuters, this was the second consecutive week of supply and product demand in the US showed the lowest figure.

Production Reduction Turns Out to Be Good for Oil Prices

According to Innes, the OPEC+ agreement is to reduce production by nearly 10 million barrels per day (BPD), which has been a record level so far. About 30 million barrels per day of oil demand has been lost amid the coronavirus pandemic because of the world economic and social restrictions.

While US Energy Information Administration (EIA) data showed crude oil inventories rose by 9 million barrels last week to 527.6 million barrels, lower than analyst estimates for a 10.6 million barrel increase. While gasoline reserves fell 3.7 million barrels from the highest record in the previous week.

Previously, global crude oil demand had dropped by 30% due to the corona pandemic. While gasoline demand over the past four weeks fell by 44% from the previous year. Overall, in the past four weeks, fuel demand has dropped 28%.

Therefore, world oil producers have begun to reduce oil production. Rystad Energy consultants project the US to reduce shale oil production by 300 thousand barrels per day for the May and June 2020 periods which could slow down the flow to storage tanks.

Oil Stocks Aren’t as Much as Expectations, Analysts Choose to Be Wary

The increase in oil in the middle of the week can’t be separated from the improvement in market sentiment related to the spread of the Corona outbreak. Slowing new positive cases in several countries, making optimism post-lockdown economic recovery spread. Italy, Spain, and France reportedly began to reopen their economies.

This step will most likely also be followed by other countries that have previously implemented lockdowns to prevent the spread of the corona outbreak. Inevitably, market participants also believe that oil demand will rise shortly. Especially after the wheels of the world economy are turning again.

According to a report by the American Petroleum Institute on Wednesday (29 / April), last week US crude oil demand increase by around 10 million barrels. It’s lower than expectations of 12 million barrels. It indicates that the demand for oil storage space is not as much as expected. 

So, it slightly quelled fears of an abundant supply amid an economic slowdown due to the Corona outbreak. However, despite the positive market sentiment, analysts warned that rising oil prices would not last long. Because the increase in demand is considered not fully realized. 

"Beware of the many volatility and price swings in the next few days, considering that bullish and bearish (reflecting) traders both reflect their hopes and fears in a market that is so desperate in finding support factors," said Bjornar Tonhaugen from Rystad Energy, as reported by Rystad Energy, Financial Times.