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 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 barrels per day (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 barrels a day. Now that pledge would have oil production in Saudi Arabia fall to 7.492 million barrels a day. Inspired by this commitment, Kuwait joined the Saudis in promising over compliance by an additional 80,000 barrel of oil per day. The UAE was also inspired to cut by an additional 100,000 barrel of oil a day. While the market seemed less than impressed because of fears of a second wave of the corona virus, 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 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 are in no hurry to offload that oil. In fact it is possible that this week we could actually see a draw at the Cushing, Oklahoma 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.
The Journal writes that, “Billionaire pipeline magnate Kelcy Warren’s company, Energy Transfer (NYSE:ET), has looked to fill some of its Texas pipelines with crude this month and leave it there until prices go back up. “Every little bit helps,” Mr. Warren says. We also spoke about water waste tanks from frack water that are being lined so they can store oil. Where there is a will there is a way, especially when you are going to get paid handsomely for it.
Gas prices are risng but diesel may fall. According to the EIA 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 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 futures and spreads are looking very interesting.
Natural gas is still being hurt by the corona virus.
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 corona virus pandemic has abruptly interrupted those efforts, delaying exploration and exports. Gas prices, already low after a relatively warm winter in the Northern Hemisphere, have plummeted and storage facilities have filled to the brim. Struggling international oil and gas companies have slashed investment budgets, jettisoning projects."
The damage to the gas trade goes well beyond the Middle East, hurting businesses from Australia to the U.S. Gulf Coast. The pandemic is putting the brakes on a two-decade-long global expansion for natural gas, which has been replacing coal for electricity and heating and even competing with oil as a transportation fuel in some developing countries. Now, tankers carrying gas in its compressed, cooled liquid form are sitting idle off the coasts of Europe as factories and businesses are only slowly coming back on line, if at all, and many people are forced to wait out the pandemic at home. “The coronavirus trajectory is a big unknown in both economic and financial impact and policy changes to manage the fallout,” said Leslie Palti-Guzman, president of GasVista, a research and consulting firm. “But it poses unprecedented risk to L.N.G. demand and investments.”