Oil rises on signals of economic recovery

Bloomberg

Oil jumped to a five-month high alongside a surge in US equities as optimism that an economic recovery may be on the horizon lifted hopes for improving fuel demand to follow.
Equities in the US, Europe and Asia strengthened, with the S&P 500 Index approaching the highest in months, bolstered by fresh stimulus out of China’s central bank. A gauge of builder sentiment in the US jumped to its highest since 1998, signaling a bright spot in an economy reeling from the coronavirus pandemic.
Further helping buoy sentiment, there are signs that some parts of the US hardest hit by the outbreak may be improving, with Florida announcing the fewest new cases since June and Arizona reporting the smallest increase in new infections in two months.
Rising homebuilder sentiment and the recovery in the stock market are contributing to “a general feeling that the economic times aren’t as bad as originally anticipated,” said Gary Cunningham, director of market research at Tradition Energy. “Optimism around the economic recovery” is translating to hopes for higher crude demand.
Meanwhile, a panel of technical experts is reviewing the deal between the Organisation of Petroleum Exporting Countries and its allies on Monday, followed by a ministerial meeting on Wednesday. The group is starting to return some crude supply to the market this month following deep reductions.
US benchmark crude futures are up almost 7% so far this month as inventories shrink and the virus crimps domestic shale operations. Crude output at major US shale plays is expected to fall 19,000 barrels a day in September to 7.56 million barrels a day, according to the Energy Information Administration’s monthly Drilling Productivity Report. That comes as a string of energy companies file for bankruptcy protection in the wake of the pandemic, with oil driller Chaparral Energy Inc. among the latest examples.
“While prices have sharply recovered, we still see substantial challenges ahead for the shale patch,” such as limited financing and increasing cost of capital for shale plays, TD Securities commodity strategists including Bart Melek said in a note. “This should bode well for prices as demand growth continues to normalise into 2021.”
Oil’s rally remains capped by the surge in coronavirus cases around the world that has depressed demand. The sale of diesel in India — the country’s most-used fuel and a proxy for its economic health — slumped 20% in the first half of August from the same period in July.