Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
The big oil deal – the biggest ever with OPEC Plus – is done. President Trump Tweeted that, “This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!” Of course it did not come without drama. Mexico, whose production is hedged, kept everyone on the edge go their seats and threatened to derail the deal and tank oil prices to unheard if levels. Yet President Trump worked to save the deal and now that it is done, U.S. oil producers may have a fighting chance to, at the very least, survive.
This comes against a backdrop of unprecedented oil demand destruction but also with the hope that demand can recover. The cut should buy the market some time and reduce the chances that storage around the globe will overflow. While many are dismissing this historic cut as too little too late, the reality is that it will provide the market some hope that we can stage a demand recover and still have some type of energy industry left to pick up the slack.
In fact the back-end of the oil curve is projecting that this deal will get prices back to a level where more oil producers can survive. The International Energy Agency (IEA) will buy oil for their reserve that will contribute towards effective oil output cuts. Still they better get cutting. The talk of the oil deal has oil wells off the lows before the markets thought that a deal could be struck, but to maintain it, we have to continue to see signs of producer compliance. Market forces have already sent U.S. oil production tanking.
Reuters reported that, “U.S. energy firms cut oil rigs for a fourth week in a row to the lowest since December 2016 with oil futures down over 50% since the start of the year after Saudi Arabia and Russia cut prices and boosted output in a battle for market share. Drillers cut 58 oil rigs in the week to April 9, bringing the total count down to 504, energy services firm Baker Hughes Co said in its closely followed report on Friday. Baker Hughes released its report a day early due to the Good Friday holiday on April 10. The oil rig count, an early indicator of future output, is down 39% from the same week a year ago when 833 oil rigs were active. More than half the total U.S. oil rigs are in the Permian basin in West Texas and eastern New Mexico, where active units dropped by 35 this week to 316, the lowest since March 2017, That was the biggest weekly decline since February 2015. U.S crude production last week fell 600,000 barrels per day to 12.4 million bpd and is expected to fall by nearly 2 million bpd by next year, according to the government and reported by Reuters.
Gasoline prices continue to plummet. Triple A reports that the national average is $186.2. RBOB futures in May fell to near 65 cents a gallon before recovering.
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