Oil Prices Surge: Production Cuts & US Reopenings Drive Gains

Oil prices rallied for a fourth day on Monday as traders looked ahead to the impact of output cuts from the world’s largest producers and the reopening of parts of the U.S. economy.

West Texas Intermediate crude oil gained 3.08 percent to $20.39 per barrel. The U.S. benchmark has gained 65 percent over its four-day winning streak. Brent crude, the international benchmark, added 2.87 percent to $27.20 per barrel.

Crude oil prices continue to see support from “a lot faster than expected production declines in Canada and the U.S., the start of the OPEC+ production cutbacks and the fact that we're not going to have a repeat of May when the June futures contract expires,” Andrew Lipow, president of the Houston-based consulting firm Lipow Associates, told FOX Business.

The world’s largest producers began enacting production cuts on May 1 that would reduce the glut of oil that has flooded the market amid the demand destruction caused by stay-at-home orders aimed at slowing the spread of COVID-19. Global demand has fallen by 30 million barrels per day as countries around the world have told people to eliminate nonessential travel.

The production cuts and the reopening of the economy have injected “a little bullish rhetoric into the fray,” said Stephen Schork, editor of the daily oil newsletter The Schork Report. At least 15 states on Monday eased some stay-at-home orders including Florida, which will allow indoor retail establishments to open at 25 percent capacity, except in Broward, Miami-Dade and Palm Beach counties.

He added it’s “highly unlikely” futures prices for June will go negative like they did in May as “small retail investors” who didn’t understand how the futures market works were behind the move.

“You don't have any of that ‘dumb money’ in the market anymore,” he said.

Lipow agreed that negative futures prices were unlikely to reappear, and reiterated his earlier stance that prices wouldn’t fall below $10 again.

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However, he warned that at $10 a barrel in the futures markets, prices at the wellhead in places like New Mexico, Texas, Oklahoma and Kansas are “in the low single digits and that is not sustainable for producers."