The Phil Flynn Energy Report
Wall of Crude
While the stock market continues to show optimism about life after the coronavirus, in the energy industry, there’s just more doom and gloom. There is a backlog and a wall of crude that the market just can't look beyond as global storage hubs fill up. Tankers filled with oil are floating in the ocean with no place to go. Producers are cutting but not fast enough to overcome the most significant demand destruction event in the history of the globe. More pain than gains in oil and before we get over the supply crisis, it remains unclear just how many energy company casualties that there will be.
The carnage to oil production will be felt for decades, and yet in the short term, it’s all about the current glut of supply. Reports that Saudi Arabia is finally fast forwarding their cuts have done little to support markets. Even stories that Russia is looking at ways to cut its output by 20% isn’t enticing buyers.
U.S. oil production is already tanking even though the numbers aren’t showing it yet. Baker Hughes reported that the U.S. oil rig count fell by 60 rigs, a sign that production is tanking. Bloomberg News reported that, "ConocoPhillips and shale producer Continental Resources Inc. have all announced plans to shut in output. Regulators in Oklahoma voted to allow oil drillers to shut wells without losing leases; New Mexico made a similar decision. North Dakota, which for years was synonymous with the U.S. shale revolution, is witnessing a rapid retrenchment. Oil producers have already closed more than 6,000 wells, curtailing about 405,000 barrels a day in production, or about 30% of the state's total.
Bloomberg News reported that Continental Resources declares force majeure on some oil deliveries. They told at least one refiner it couldn't make an oil delivery after the global pandemic sent prices plunging, a move refiners called the "height of hypocrisy" following billionaire founder Harold Hamm's calls to limit imports.
The big bankruptcy reported this weekend was Diamond Offshore Drilling. The Wall Street Journal reported that the company filed for bankruptcy protection Sunday. The Houston based contract driller said it sought protection from creditors under Chapter 11 after the downturn in the offshore-drilling industry "worsened precipitously" because of the oil-price war between the OPEC countries and Russia along with the Covid-19 pandemic, in papers filed in a Houston bankruptcy court. S&P Global Ratings recently downgraded the company's debt after Diamond skipped an interest payment to bondholders, which started the clock on a 30-day grace period to either pay up or default. On Friday, the rating agency cut its rating on Diamond Offshores debt to D, indicating it expected the company not to make the payment.
Late Friday, heating oil and products took a hit on reports that Mexico has declared a force majeure on importing gas and diesel. Most of Mexico's imports of gas and crude come from the U.S. Demand has fallen, and they can't store the product. U.S. refiners can’t sell it elsewhere because its specifications are unique to Mexico.
The front end of the oil curve is still dangerous and expect high volatility. Many are waiting for a total meltdown, which may or may not happen. The market is looking at the Trump Administration for a plan to help oil companies and ease the glut. They need to move quickly to avoid another price crash. Moving oil to the Strategic Petroleum Reserve needs to start soon. Yet the back end of the curve looks more solid. As the world gets back to work and production investment drying up, we, at some point, will suck-down the glut.
Natural gas will be under pressure as shoulder season demand will hurt demand worse than it already is. Of course domestic production may take its biggest hit in a decade.
Don’t miss out on my wildly popular trade levels on all major markets as well as special subscriber-only updates. Call me at 888-264-5665 or email me at email@example.com.