The price of a barrel of the North American crude oil benchmark topped $30 for the first time since the middle of March on tentative signs that people are starting to drive again amid the COVID-19 pandemic.
The June contract for West Texas Intermediate was up by $2.65 US to $32.05 a barrel on Monday. That’s the highest level for WTI since March 13, before lockdowns to counter the coronavirus put energy demand into a deep freeze.
The plunge in oil prices was so dramatic that the WTI contract briefly dipped below zero last month as traders frantically dumped contracts to receive physical oil because of a lack of places to store it.
That plunge happened in part because of a trading glitch as the contract switched over from May delivery to June, and there’s no sign of something similar happening this time around as the same switch from June delivery to July is set to happen on Tuesday.
The newfound optimism in oil stems from signs that the economy is taking its first cautious steps toward reopening. Numerous Canadian provinces have loosened restrictions on travel and are allowing more and more businesses to reopen. Some U.S. states have gone back to virtually the same level of activity as they had before.
That’s leading to a tiny uptick in demand for two major uses of crude oil: gasoline for drivers and jet fuel for flyers. Both are still well below their previous levels but have inched up in recent weeks. Gasoline use in the U.S. has risen by two million barrels a day from its bottom in April, still two million barrels below where it was before COVID, data from the U.S. Energy Information Administration showed this week.
Increasing gasoline consumption implies that people are driving again, which in turn suggests they are going to work again. That’s a trend that can be plainly seen by looking at traffic patterns, which show that traffic volumes are getting back to near what they used to be, says Mark Le Dain, head of business intelligence and strategy at Validere, a data intelligence firm that advises companies in the energy sector.
He cites data from GPS firm TomTom showing traffic volumes in many Asian cities are back to where they were before, especially during weekday commuting times.
“Clearly, when those that need to get to work are commuting, they are driving versus [taking] public transit,” he told CBC News, because many are wary of being in a crowded space.
“The response in gasoline demand is starting to play out globally, and could be an unexpected source of near-term demand [for] energy,” Le Dain said.
Supply and demand
Signs of slightly higher demand are coupling with similar trends toward lower supply to boost prices.
Saudia Arabia, which launched an ill-timed price war with Russia for control of the oil market just before COVID-19 hit, said Monday that it would slash its oil production by another million barrels a day starting next month.
That should be enough to boost oil prices even more, said Mohamed Zidan, chief market strategist of ThinkMarkets.
“The market was expecting a [larger] cut in the last agreement,” he said. “We didn’t reach that. However, this step further will bring back that balance. It will increase the high prices.”