Oil prices surge to 2-month high on hopes of demand rebounding and output cuts paying off

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Oil prices surge to 2-month high on hopes of demand rebounding and output cuts paying off
FILE - In this March 7, 2020 file photo, a man walks past a banner showing Saudi King Salman, right, and his Crown Prince Mohammed bin Salman, outside a mall in Jiddah, Saudi Arabia. Saudi Arabia announced Monday, May 11, 2020, it is tripling taxes on basic goods to 15% and will cut spending on major projects by around $26 billion as it grapples with blows from the coronavirus pandemic and low oil prices on its economy. (AP Photo/Amr Nabil, File)Associated Press
  • The price of West Texas Intermediate crude oil jumped to a two-month high on Monday as production cuts showed signs of working and countries began lifting lockdowns.
  • Brent, the international benchmark, also rose to its highest levels since March, when Russia and Saudi Arabia began waging an oil-price war.
  • Energy Intelligence reported Monday that OPEC production cuts may remain in place for the rest of 2020.
  • Track the price of oil live on Markets Insider.
  • Visit Business Insider's homepage for more stories.

Crude oil prices jumped to a two-month high on Monday, reflecting output cuts and investors betting that looser lockdowns will boost demand for fuel.

West Texas Intermediate, the US benchmark, was trading 7.1% higher at $31.80 a barrel as of 6:45 a.m. ET. Brent, the international benchmark, was up 5.1% at $34.40.

Oil supply cuts are paying off

Naeem Aslam, chief market analyst at Avatrade, said it was turning out to be a "remarkable day" for both WTI and Brent.

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"The global economy is reopening and the oil glut has eased off," he said.

The combination of global production curbs and recovery expectations has been driving oil prices higher, Jeffrey Halley, OANDA's senior market analyst for Asia Pacific, said in a note on Friday.

The Organization of the Petroleum Exporting Countries (OPEC) and its allies reached a deal to cut oil production by 9.7 million barrels per day in May and June to shore up the price of the commodity. Prices tanked earlier this year as the coronavirus pandemic weighed on economic activity and Saudi Arabia and Russia waged a bitter oil-price war.

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Read more: GOLDMAN SACHS: Buy these 14 stocks poised to surge in an economic recovery because of their limited exposure to consumers.

Energy Intelligence reported on Monday that OPEC may extend the cuts to the rest of the year, citing an unnamed OPEC delegate.

Moreover, several countries including Italy, Iran, Spain, Israel, and Germany that previously enforced strict lockdowns on their populations are in the process of easing them. However, the risk of a second wave of infections resulting in a fresh set of restrictions remains.

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Several US states are also lifting lockdowns. Georgia, South Carolina, and Montana had eased restrictions as of May 15 and others including Texas, Maine, and Illinois have partially reopened.

The combination of supply cuts and greater hopes for a demand recovery, among other factors, are boosting oil prices. Both WTI and Brent outperformed on Monday due to "China stimulus measures, decreasing supply and peak virus hopes," Halley said.

Read more: A Wall Street equity chief lays out 5 reasons why another 'significant drawdown' in stocks is coming right after the fastest crash in history

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The WTI contract for delivery in May turned negative for the first time in history on April 20 as coronavirus tanked demand for the fuel, and due to an extreme shortage of storage facilities, particularly at a key hub in Cushing, Oklahoma.

However, a repeat is unlikely when June contracts expire as market forces are pushing prices higher, Halley said.

The oil market is still prone to uncertainty

Analysts welcomed Monday's gains but questioned whether prices will remain stable in the long term.

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Aslam said: "It is still unclear if the prices can continue their upward journey at the current pace, and especially if we have a valid reason for the crude price to top the $35."

Markets remain in a "tug-of-war pattern" where it remains unknown "whether the damage will be a lot worse than feared or the recovery will be much swifter," Neil Wilson, chief market analyst at Markets.com, said in a morning note.

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