Oil Production Cuts and Creative Alternatives to Cushing

May 12, 2020 08:24 AM
Kuwait joined the Saudis in promising over compliance with production cuts
Water companies are expanding into crude storage
Gas prices are rising but diesel may fall
The Energy Report



The Phil Flynn Energy Report 

Cuts Are Coming

Oil is back in rebound mode as the market is getting assurances that massive production cuts are coming. Not only has Saudi Arabia led the way with a promise to over comply with 1.0 million barrel a day (BPD) production cuts, the UAE and Kuwait have also committed to cut more than the agreed-upon cut. Now comes word that Russia is making progress on reductions.

Reuters reports that, “Russian oil and gas condensate production declined to 9.45 million BPD, on May 1-11, sources familiar with the data told Reuters on Tuesday, following a global deal on output cuts. The decline is from 11.35 million BPD Russia produced on average in April and from the 9.5 million bpd produced on May 1-5.”

The Saudis pledged to cut production from close to 13 million barrels of oil to 8.5 million BPD. Now that pledge would have oil production in Saudi Arabia fall to 7.5 million BPD. Inspired by this commitment, Kuwait joined the Saudis in promising over compliance by an additional 80,000 BPD of oil. The UAE was also inspired to cut by an additional 100,000 BPD. While the market seemed less than impressed because of fears of a second wave of Covid-19, a day later it seems to be sinking in. Demand is only going to get better from this point forward as more of the world starts to reopen.

This comes as fears that the U.S. storage hub in Cushing, Oklahoma will overflow is diminishing. Entrepreneurs are getting inventive finding alternative storage as U.S. oil production is falling sharply. As far as talk of that oil on ships waiting to unload, with the contango, they're in no hurry to offload that oil. In fact it’s possible that this week we could actually see a draw at the Cushing delivery point. Upstream, Macquarie Bank Ltd reportedly is calling for a 1.0 million barrel drop at the storage hub. That also means that a return to subzero pricing in the futures market is increasingly unlikely.

The Wall Street Journal writes as far as storage, “Demand for oil storage is so fierce that water companies are expanding into crude storage, using large cylinders that resemble big above ground swimming pools. Cooley Group Holdings Inc., a textile-manufacturing company in Rhode Island, is churning out tens of thousands of pounds of polymer-coated fabric to line cylinders that another company, Well Water Solutions and Rentals Inc., has begun installing in West Texas. Each cylinder is about 190 feet in diameter and can hold roughly 50,000 barrels.” 

Gas prices are rising but diesel may fall. According to the EIA’s weekly diesel prices series, the average U.S. retail pump price for diesel dipped 5/10ths of a penny to $2.394 per gallon this week vs. last week, while regular gasoline jumped 6.2 cents to $1.851 per gallon. That leap in gas prices may continue as demand is coming back faster than the refiners. RBOB Gasoline futures and spreads are looking very interesting.

Today The New York Times reports, “A few months ago, Israel and some Arab countries were laying the groundwork for an energy partnership that held the potential for economic cooperation between once-hostile neighbors. Israel started selling natural gas to Egypt, which in turn was reviving two gas export terminals, attracting badly needed foreign investment and opening a path for Israeli gas to Europe. Lebanon was preparing to drill its first offshore gas well after years of delays. And Palestinian representatives joined a regional forum with officials from Israel and other countries to lift energy exports to Europe. But the coronavirus pandemic has abruptly interrupted those efforts, delaying exploration and exports.” A must read in The New York Times.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.