The Phil Flynn Energy Report
I guess we all feel like shut ins these days but it’s 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. Because of the sharp pullback in demand due to the coronavirus, there’s 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 it’s also taken a hit internationally. 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 month-on-moth to 420 in April. The rig count crashed 450 rigs worldwide in April to 1,514, from 1,964 in March 2020. That’s down over 30% in the month of April, a shocking drop.
The U.S. rig-count has been dismal. According to last Friday’s Baker Hughes Rig Count report, 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.
Covid-19's hit to shale as well as the Russia-Saudi Arabia price war 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's gaining steam is for the government to buy oil in the ground from producers on the condition that they wouldn’t 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 Strategic Petroleum Reserves 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 2 weeks ago, gasoline demand has bottomed out and refiners haven't been keeping pace. The API report showed that gasoline supply actually fell by 2.23 million barrels. We’re 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.
API also reported, as expected, crude supply increased by 8.44 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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