Cushing Storage Number Will Make or Break the Oil Rally

U.S. producer continue to slash production
API weekly crude oil inventory report released today
The Energy Report

The Energy Report

 

The Phil Flynn Energy Report 

The Comeback

Everybody loves a comeback, and oil is rallying for the 5th day in a row on comeback hopes. Oil prices are shaking off fears of oil storage overflowing. Energy-industry data firm Genscape reported an increase in inventories of 1.8 million barrels at Cushing, Oklahoma, the delivery point for WTI crude. That would be the smallest weekly gain since mid-March if confirmed by official data due Wednesday, according to Bloomberg News. The market is also pricing the oil demand comeback as cities in Europe and Africa. Some U.S are starting to reopen. 

U.S. production may have its biggest retraction in history. Reuters reported earlier that Exxon Mobil Corp and Chevron Corp are slamming the brakes on oil output, as the top 2 U.S. producers plan for combined global shut-ins of 800,000 barrels per day (BPD) in response to plunging crude prices and fuel demand. And that's just the big guys. The Investor Business Daily reports that Permian Basin shale giant Concho Resources said last week it plans to slash its 2020 capital budget further to $1.6 billion, representing a 40% decrease from its initial view. Continental Resources reportedly stopped nearly all drilling in the Bakken shale formation.

Reuters reports that Resource Energy turned attention to the Bakken shale region in North Dakota, where the company, a relatively small producer, operates. Costs of extracting are some of the highest in the United States. So are the costs of transporting due to limited storage and the distance to refineries and consuming centers. Oil producers in the Bakken, which sprawls across North Dakota and eastern Montana, on average break even at $46.54 a barrel, according to an analysis by Deutsche Bank. That is well above the around $40 a barrel in the larger Permian basin. Bakken crude fetched $3.40 a barrel on April 21. It has since recovered to about $14, still below the cost of producing.

The team at Resource Energy realized they would need to consider shutting down the remaining 20% of output still operating in the Bakken shale region, Kent said. North Dakota, second only to Texas in oil output among U.S. states, was taking a big hit. In just one day in late April, some 60,000 BPD were shut in the country. Production has dropped by at least 400,000 BPD since March 1, nearly a third of the state’s around 1.4 million BPD output before the crisis. State officials expect the volume shut in to rise further.

Reuters also reported that last month Texas Railroad Commissioner Ryan Sutton urged the first mandated cuts in 50 years. He promoted the idea on Twitter and TV, calling on his fellow commissioners to consider curbing 1 million BPD and winning audiences from OPEC Secretary-General Mohammad Barkindo and Russian Energy Minister Alexander Novak. But Sutton scrapped the plan a day before his commission, which regulates oil and gas in the state, was to vote on the proposal. Small and large companies, including Chevron, Exxon Mobil, and Occidental Petroleum, were already planning to cut hundreds of thousands of barrels per day of shale, well ahead of any state action. “This is dead,” Sutton told Reuters in an interview. “What we should have done 6 weeks ago now would no longer have the right impact. We lack the leadership between the 3 commissioners to get that done.”

Texas is the largest U.S. oil-producing state, pumping about 5.4 million BPD of crude. Last year its output rose by 600,000 BPD, to about 41% of the nation’s total. The pullback in shale output may bring back, "hurricane premium back into the natural gas market."

Optimism in the oil market is raising confidence in stocks. Still, we know that this price recovery is being delivered with a lot of pain by those in the oil industry. The trade will focus on the API's weekly report tonight. Keep an eye on the Cushing number. If it comes out similar to what the private forecasters are predicting we could see this rally continue.

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 pflynn@pricegroup.com.

 

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.