Oil futures fell Friday, with traders citing uncertainty about demand for fuel and rising U.S.-China tensions over Hong Kong, but the U.S. crude benchmark remained on track for its biggest monthly rise in more than a decade.
West Texas Intermediate crude for July delivery was down 88 cents, or 2.6%, at $32.83 a barrel on the New York Mercantile Exchange, while August Brent the global benchmark, was off 81 cents, or 2.3%, at $35.22 a barrel.
Through Thursday, WTI futures, the U.S. benchmark, were up 78.9% for May, on track for the biggest monthly rise since May 2009, according to Dow Jones Market Data. Brent was up 39.7% for the month, its strongest rise since April 2015.
Global equities and other assets perceived as risky were under pressure after President Donald Trump said he would hold a Friday news conference to discuss the U.S. response to China’s efforts to impose new security laws on Hong Kong that could undercut the territory’s autonomy.
“With tension running high due to the Hong Kong security plan passed by China and overnight talk about China’s Taiwan reunification intentions adding more fuel to the fire, the wider geopolitical fallout from the coronavirus situation seems to be getting more problematic by the day,” wrote analysts at JBC Energy, a Vienna-based consulting firm, in a note.
Oil prices collapsed in March and April as global demand for crude was destroyed by lockdowns of major economies in a bid to contain the COVID-19 pandemic. Pressure was exacerbated by a short-lived price war between Saudi Arabia and Russia that further flooded an oversupplied market with unneeded crude. That feud came to a halt after the Organization of the Petroleum Exporting Countries and its allies agreed to renewed production cuts. In addition, producers outside the pact, including U.S. shale drillers, have moved to sharply curtail activity in response to the price plunge.
Meanwhile, signs of renewed demand as the U.S. and other major economies emerge from lockdown have helped fuel strong May gains, though some analysts worry the rebound in prices could dampen production cuts.
“While oil prices remain low on an absolute basis, differentials and the shallow contango in the forward curve indicate a market that is at least functioning more normally,” said Jason Gammel, analyst at Jefferies, in a note. Contango is a condition in which later dated oil futures trade at a premium to the spot price. As oil prices collapsed, the contango steepened sharply, underlining the incentive to store crude.
“Our concern is that prices have reached a level that does not incentivize curtailments/cuts; this supply-driven rally is at risk if production returns too quickly,” Gammel said.