The Phil Flynn Energy Report
Let the Cuts Begin
Oil prices are defying current oversupply and instead are focused on the start of the most significant oil production cut in history. According to Reuters, to get the deal done, President Trump suggested that if the Saudis didn’t cut production then he could nor restrain the hand of Congress to remove U.S. military presence in Saudi Arabia. That offer to the Saudi Arabians, along with other oil production cuts in the U.S. that are being forced upon producers and refiners by market conditions, has stabilized the global oil market.
Reuters reported that, “As the United States pressed Saudi Arabia to end its oil price war with Russia, Trump gave Saudi leaders an ultimatum. In an April 2 phone call, he told Saudi Crown Prince Mohammed bin Salman that unless the OPEC started cutting oil production, he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from the kingdom, according to sources familiar with the matter. Trump delivered the message to the crown prince 10 days before the announcement of production cuts. The kingdom’s de facto leader was so taken aback by the threat that he ordered his aides out of the room so he could continue the discussion in private, according to a U.S. source who was briefed on the discussion by senior administration officials. A senior U.S. official told Reuters that the administration notified Saudi leaders that, without production cuts, “There would be no way to stop the U.S. Congress from imposing restrictions that could lead to a withdrawal of U.S. forces.” The official summed up the argument, made through various diplomatic channels, as telling Saudi leaders: “We are defending your industry while you’re destroying ours.”
Reuters asked Trump about the talks in an interview Wednesday evening at the White House, at which time the president addressed a range of topics involving the pandemic. Asked if he told the crown prince that the U.S. might pull forces out of Saudi Arabia, Trump said, “I didn’t have to tell him.”
The market is starting to grasp the potential impact of what will be the most significant oil and product production retrenchment while respecting the current massive oversupply. The market is focusing as well on gasoline that is going to see demand rise faster than refineries refine it that are too are afraid of margins tanking. There are still concerns about June crude oil delivery as Cushing, Oklahoma storage is filling. Yet the pace of increases is suggesting that some producers are considering alternative means of oil storage.
The Energy Report was one of the first to report that some frack water containers are now being repurposed to store oil. Because of the enormous contango in the futures markets, people are looking at more ingenious ways to save it. You can still make big money if you can find storage. Buy it today and lock in a much higher price in the future when demand comes back, and production still will be restrained.
Stocks and oil pulled back after Christine Lagarde spoke yesterday. She said that she can't solve the Covid-19 crisis and that the ECB can't force banks to lend, nor governments to spend. Lagarde said that managing the Covid-19 crisis goes way beyond the powers of the central bank. So much for that "whatever it takes" thing. I think I miss Mario Draghi.
For oil and products, early reports suggest that compliance to cuts will be high. Canada has shut in a million barrels of oil production. The U.S. will see production drop by over 2 million barrels a day over time and OPEC+ will add their 9.7 million barrel. If you can survive the June delivery and the global economies continue to open up, we should be near the bottom.
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