Oil rises with stronger equities on signals of economic recovery

Equities in the U.S., Europe and Asia strengthened on Monday, with the S&P 500 approaching an all-time high, bolstered by fresh stimulus out of China's central bank. A gauge of builder sentiment in the U.S. jumped to its highest since 1998, signaling a bright spot in an economy reeling from the coronavirus pandemic. Helping buoy sentiment, there are signs that some parts of the U.S. hardest hit by the outbreak may be improving, with Arizona reporting the smallest increase in new infections in two months and no deaths.

Equities are rising, lifting all asset classes and reflecting the outlook that "we're getting closer to some kind of economic recovery," said Phil Streible, chief market strategist at Blue Line Futures in Chicago. "We've seen a big recovery in the equity markets, we're seeing the reflation trade take off, why not oil participate in that."

Meanwhile, a panel of technical experts is reviewing the deal between the Organization 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.

U.S. benchmark crude futures are up over 5% so far this month as inventories shrink and the virus crimps U.S. shale operations. In fact, oil driller Chaparral Energy Inc. filed for bankruptcy protection, adding to a string of energy companies that have done so amid the pandemic.

"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 normalize into 2021."

Oil's rally remains capped by the surge in coronavirus cases around the world that have 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, according to people familiar with preliminary data from the country's three biggest fuel retails.

With the pandemic crippling consumption for gasoline and diesel during the normally active summer driving season, refiners on the U.S. Gulf Coast are cutting run rates or considering whether to restart certain process units after maintenance in response. Calcasieu Refining has idled its entire Lake Charles refinery in southwest Louisiana and may keep it shut for the rest of the year unless product demand improves. Exxon Mobil Corp. has also idled a key process unit at its Baton Rouge, Louisiana, refinery due to weak demand.

OPEC+ is planning to return about 1.5 million barrels a day to the market this month after trimming roughly 10% of global supply following a crash in demand due to the pandemic. Iraq has also made its strongest commitment yet to implement deep output cuts, including deeper cuts in the coming months to compensate for missing previous targets.

OPEC+ sees overall implementation of its pledged production cuts in July of 95%, before the meeting of the group's Joint Technical Committee to formally assess compliance, said delegates.

"Unlike at the July JMMC when the market was waiting for guidance on an extension of the deepest of supply cuts to August, at this meeting there is no supply policy determination to make," said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas. "We expect the committee to reinforce the same message of compliance and group discipline as it did at the July meeting."