The GERM Report

-Fears of overflowing storage are subsiding.

-OPEC sees worst contraction coming in 2Q.

The headline in Reuters is that Hollywood can learn a thing or two from the porn industry, and again those of us observing the oil market can learn a thing or two from the health sector. Testifying via video conference, Dr. Anthony Fauci warned that “little spikes” could lead to something worse if economies open up too soon. That holds too for commodities. Crude oil prices are up more than 20% this month as the threat of overflowing storage tanks subsides and national economies start to reopen. Saudi Arabia, meanwhile, is advocating discipline among producers. But these “little spikes” for commodities could be indicative of bigger problems in the future.

The price for Brent crude oil was up 0.93% to trade at $30.26 per barrel at 8 a.m. ET, about a half hour before the release of the OPEC monthly market report for May. Some members of the production group are already calling for further restraint to balance the market, and the IEA agrees.

Fatih Birol, the head of the IEA, said in a webcast interview with Gulf Intelligence that producers may need more curtailments in order to prevent future strains.

“Demand will not jump from one day back to levels we had before the crisis and we still have a huge amount of surplus, and plus a lot of floating oil around the world, so therefore one needs to be very careful if one doesn’t want to change,” he said.

And in Saudi Arabia, that sentiment prevails. While pledging, along with its GCC allies, to cut more than expected under the new OPEC+ arrangement, the Saudi government suggested even more restraint was necessary. Parties to the agreement, as well as non-OPEC producers, are urged “to provide more reduction in production in order to contribute to restoring the desired balance of the global oil markets,” a Cabinet statement read.

Market-driven curtailments have already prevented storage tanks for overflowing. With US majors such as Continental Resources cutting back, the American Petroleum Institute reported that stocks in Cushing, the delivery point for US crude, fell by 2.3 million barrels last week. If federal data follows suit, it would be the first draw on US crude since February. Contango, where late contracts cost more than near-term ones, is a market structure related to storage. Not enough storage and the gap between near and late dates widens. The spread exploded in April but is now thinning.

But we’re not out of the woods. ING economists say the worst of the economic crisis is over, but second quarter GDP figures may still point to deep contraction. For OPEC economists, “the worst contraction in major oil demand centers around the world is expected to take place in the 2Q20.”

Testifying before the US Senate, Fauci, the top infectious disease expert in the United States, said that opening the US economy too soon raised concerns that “little spikes” in infections “might turn into outbreaks.” An outbreak in the crude oil market could have the unintended consequences of stimulating shale production, encouraging OPEC+ cheating and crimping demand on inflated pricing. OPEC in its monthly market report for May said demand destruction “can be mitigated with sooner-than-expected easing of government COVID-19 related measures,” though health officials continue to warn against that very measure. Irrational exuberance about global health and the global economy could make the second wave worse than the first.