Oil Market Healing As Demand Recovers, Risks Remain

The country looks broken, the oil market is healing. A potential extension of the OPEC plus production cuts, as well as recovering oil demand, sent Brent crude back above $40.00 for the first time since the Russia/Saudi Arabia production war broke out. Bloomberg reports, "A meeting between OPEC and its allies this month was in doubt as Saudi Arabia and Russia drew a hard line over quota cheating by some nations that broke prices, global demand indicators are on the rise. Inventive ways to use oil storage with help from the Strategic Petroleum Reserve[SPR] has allowed the market fundamentals to get back to a semblance of normalcy.  That showed up in the American Petroleum Institute (API) weekly supply report as overall oil supply fell by 483,000 barrels and another draw of 2.2 million barrels in the Cushing Oklahoma delivery point.” Allowing private companies to use the SPR to store oil until it is needed to help save many producers from ruin in what is now clearly a coronavirus oil demand shock, is already on track to recover. What we see in the oil market should offer hope to the country that we can heal and come back even when there are those that traffic in doom and despair....

Oil's impressive run could be threatened if Russia and Saudi Arabia cancel the OPEC Plus meeting. Recently, the tension in the OPEC Plus group is between the Saudis and the Russians. Now they are joining forces to send a message to OPEC cheaters signaling Iraq and Nigeria, among others. Reports are that Iraq is already saying that it has been because of technical reasons that they have not met their quota and fully intend to get to full compliance. I expect that the meeting will happen despite the threats.

The American Petroleum Institute (API) also reported that product supply in gasoline increased by 1.706 million barrels and another massive increase of 5.917 million barrels in distillate supply.

In the Energy Information Administration report tonight, looks at US oil production and gasoline demand to set the direction of the market. The market will look at gasoline demand over the Memorial Day weekend. We should see a big jump even though we will be well below year-ago levels. US production will continue to contract at a historic pace even as reports say shale may start to come back. Reuters reports that, “Shale producers Parsley Energy Inc (NYSE:PE.N) and EOG Resources Inc (NYSE:EOG.N) on Tuesday disclosed plans to restore some or all of their output cuts. In North Dakota, state energy officials this week reduced by 7% an estimate of production shut-ins in the second-largest oil producing state. Production coming back online is a fraction of what has been cut. Still, returning shale output may complicate deliberations among the Organization of the Petroleum Exporting Countries (OPEC) and allies when they meet on Thursday to consider extending an agreement to cut a record 9.7 million barrels per day (bpd) to offset the lost demand from the coronavirus outbreak.”

Oil has other risks as well. Tropical storm Cristobal could have a significant impact. The National Hurricane Center tweets that, "There is a risk of storm surge, rain & wind impacts this weekend along portions of the US Gulf Coast from Texas to the FL Panhandle. While too soon to determine any specifics, interests in these areas should monitor #Cristobal & ensure they have their hurricane plan in place. With the significant pullback in US shale and onshore production, hurricanes will have a more substantial impact on oil and natural gas prices because we are going to feel Gulf of Mexico production shut-in more acutely. The storm potentially could impact oil imports and exports so far supply data will be skewed in the coming weeks.

The natural gas market could rebound on the storm despite an oversupplied situation. Andy Weissman at EBW Analytics warns that, "nosediving LNG demand contracted 3.0 Bcf/d in less than a week. If this weakness is sustained, summer feed gas expectations may be revised down 2.0 Bcf/d—likely precipitating another leg lower for natural gas. Power sector gas burn may rise 10-12 Bcf/d by mid-July, but the development of Tropical Storm Cristobal could postpone near-term gains for NYMEX gas until later in June. Restarting oil production may help increase dry gas production 2.5 Bcf/d by mid- to late July, delivering yet another blow for natural gas. The July gas contract has declined 39.3¢ (-18.1%) since April 30th. The pace of any further losses is likely to subside as shorts take profits and the Market attempts to consolidate heading into the summer.