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
I guess we all feel like shut ins these days but it is shut ins in the oil patch that has catapulted prices from the abyss back up over 50%. The reason for the incredible rebound is more signs of retrenchment in oil production, almost ensuring a time of oversupply into expected future shortages.
Around the globe the pullback in energy production spending could hit historic proportions and because of the sharp pullback in demand due to the coronavirus, there is no choice but to cut back instead of trying to look at the big picture. We know the U.S. and Canadian rig count has been falling but also internationally it has taken a hit. Baker Hughes reported that the international rig count fell by 144 month-on-month in April 2020, bringing the total count to 915. The Middle East rig count fell by 8 MoM to 420 in April. The rig count crashed 450 rigs worldwide in April to 1,514, from 1,964 in March 2020. That is down over 30% in the month of April, a shocking drop.
The U.S. rig-count has been dismal. On Friday Baker Hughes reported that the U.S. rig count dropped by 53 to 325. The total active U.S. rig count also fell by 57 to 408. The shale patch has been hit hard. S&P Global reported that the number of rigs active in the Permian Basin was down 33 at 229 last week, fully 47% lower than during the same period last year. The Permian has seen rig totals drop by 47% since the first week of March, plummeting 200 rigs from a total 429 rigs.
The hit to shale from the virus as well as the Russia/Saudi price water could cause a total setback for U.S. shale and many are hoping that the Trump Administration will do more to help them. Obviously ending the Russia Saudi price war was a great first step but more may need to be done as the U.S. already is becoming more dependent on imports for natural gas for example. One proposal that is gaining steam is for the government to buy oil in the ground from producers on the condition that they would not produce it for 60 days. The government and the producers could then take advantage of the contango and it could be a win win for both parties. Another idea is to expand the SPR to a billion barrels. The Trump Administration may act soon as the President was cheering yesterday’s rally in oil. He tweeted, ”Oil prices moving up nicely as demand begins again!”.
That means go fill up your gas tanks. The era of cheap gasoline may be over. Again. As I have noted two weeks ago, gasoline demand has bottomed out and refiners have not been keeping pace. The American Petroleum Institute(API) in their report showed that gasoline supply actually fell by 2.23 million barrels. We are already seeing gas price go up at the pump and as the U.S. starts to reopen, those cheap gas prices that hardly anyone could take advantage of may become a thing of the past.
The API also reported, as expected, crude supply increased by 8.440 million barrels. The shock in the API report was the fact that distillates increased by a whopping 6.143 million barrels.
More sign that Russia is serious about production cuts. Reports that Pavel Sorokin, the Russian Deputy Energy Minister says that Russia will reach its peak of oil output cuts. He says that there is no reason for oil to fall below zero. Further Sorokin said that a return to pre-virus oil demand will take a long time and that nobody is interested in breaking OPEC+ deal now. While full compliance may be difficult for some countries he is warning that a violation of OPEC+ deal would bring new collapse in oil.
Natural gas continued its bull run. Talk of some record cold for this time of year is putting more upward pressure on this suddenly challenged market from the production side. There is even some talk of snow in May! There ought to be a law against that!
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