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  • Oil demand in the world’s top oil importer has rebounded.
  • Global economies sucking up the stockpiles, WTI buoyed. 
  • Risks of coronavirus contagion and bearish positioning remain a weight.

The price of a barrel of oil is currently trading at $31.58 having travelled between a range of $31.15 and $32.89, -1.89% at the time of writing. The risk-on sentiment is fading as we progress through the week although that is not to say the fundamentals are not favourable for oil in the near term.

Since the recovery in oil prices, there has been a switch-up in themes which are buoying prices in the energy sector. Economies are opening up again which is seeing demand pick up at a time where tumbling supply from both OPEC+ nations along with market-driven cuts led by the shale patch kick in. 

Oil demand in the world’s top oil importer, China, has rebounded to pre-coronavirus levels which have underpinned this sizeable move in the energy complex. According to Bloomberg’s sources on Monday this week, “China’s gasoline and diesel consumption are already back to the pre-virus levels—a bullish sign for the oil market, which is looking at China for clues about when demand in the rest of the world could return to some form of normality.”

China’s oil demand had dropped by 20% In February and in early March due to the in the full lockdown and extended factory shutdowns and holidays. Over the past few weeks, more and more encouraging signs have emerged that China’s demand is recovering and helping lift global oil demand from the lows of the ‘Black April.’

So, there are two sides to the argument

The pent up demand on a global scale has seen Oil futures start the week off by posting their highest settlement in more than two months.
However, while we are seeing “optimism in the market, there is still plenty out there to be pessimistic about. As economies open up, so do the prospects for contagion. Moreover, the damage to the world economy has already been done.

Further upside will most likely be limited while huge stockpiles remain available along with plenty of spare capacity. Over $100 billion of capital expenditures have been cut and the US declines in the active rig count indicate lower activity. So, there are two sides to the argument.

Analysts at TD Securities explained, “as the rate of inventory accumulation continues to ease, so will the steepness of the super-contango. We remain long WTI Dec20-Dec21 spreads to express this view.” However, the analysts were adding, “with that said, CTAs remain positioned for further downside, and we do not expect significant flow from this group of participants.”

WTI levels