U.S. oil prices on track for weekly gain, continuing bounce after April rout

The U.S. oil benchmark made headlines early last week when the May West Texas Intermediate crude contract traded and settled in negative territory for the first time ever. While that was in large part due to the skewed mechanics of the expiration process amid a storage crisis, it was seen as emblematic of a bear market that has seen oil prices suffer a historic plunge.

An early unwinding of a large chunk of June positions by exchange-traded products in an effort to avoid a rerun of the May debacle may have made room for crude to bounce this week, said Craig Erlam, senior market analyst at Oanda.

Analysts said the supply overhang is likely to keep a lid on crude prices in coming weeks and months, though some see scope for a recovery later in the year as producers slash output and reduce investment in response to the collapse in prices.

“We expect that these low prices will eventually rebalance the market through stronger demand growth as the COVID-19 recession recedes and rapidly falling U.S. shale production,” said Jason Gammel, analyst at Jefferies, in a note.

“The plummet in prices has already forced many large E&P companies to slash their capital budgets (and dividends) and we expect the same across the industry,” he said. “Ironically, this swift and severe price downturn could lay the groundwork for a significantly undersupplied market beyond 2021, albeit one with bloated inventories.”

OPEC countries and allies are due to start cutting production after agreeing in April to reduce output by 9.7m barrels a day in May and June. but demand is plummeting faster still as the COVID-19 epidemic shutters travel.