Since bottoming on April 21, oil prices have posted a strong rebound. That was the infamous day when the front-month contract went negative. Later-month contracts also moved lower but not as extreme. For example, the August contract hit $21 that day and is currently at $35.77.

Several extraordinary forces collided to create that moment including Saudi Arabia disciplining Russia and the rest of OPEC who couldn't agree on supply cuts by increasing its supply and a sudden plunge in demand due to the coronavirus and economic shutdown. Nearly, all available storage had been filled. At the contract delivery date, oil prices went negative as nobody wanted to take delivery of the physical commodity.

Recent Developments

With hindsight, it seems clear that it marked the capitulation point. Demand has started to recover as economies begin to reopen. Countries that have weathered the coronavirus like China and South Korea are showing oil demand back to near-normal levels and strong recoveries in data like automobile traffic and industrial production.

Additionally, the supply equation has changed. Shale production seems to have peaked, and the investments to find new production have been curtailed. Same for oil sands projects in Canada. This new source of supply has been one factor in oil's bear market over the past few years. OPEC and Russia agreed to cut production by 11 million barrels per day, and those cuts are expected to be extended for another one to three months.

Looking Forward

Oil's recovery shows that the market has gone from oversupply to a slight undersupply. However, one headwind for oil prices is the massive amount of oil barrels that are in storage. According to the IEA, the world currently has just under 1 billion barrels of crude stockpiled. If demand returns to normal levels and OPEC maintains discipline by not immediately increasing production, this stockpile could quickly vanish.

Then, a world of more inflation and higher energy prices could emerge as shale and oil sands production will not immediately come back, because new investments will require sustained, high prices. Of course, there are also more bearish scenarios like a second wave of the coronavirus which leads to another round of demand destruction in oil that could be even more vicious due to stockpiles already being full. It's also possible that OPEC's unity could dissolve if oil prices are no longer in freefall mode.