Oil is again defying the skeptics and is in an amazing race with the forces of supply and demand to get into balance. Even as the U.S. gasoline demand recovery seemed to sputter falling 538,000 barrels a day in the weekly Energy Information Administration (EIA) weekly data, the biggest crude oil draw this year had oil shorts running for cover. Instead of running out of storage, Cushing Oklahoma saw a massive 5.57 million barrel draw, the largest ever draw at the NYMEX delivery point. Falling U.S. oil production and OPEC Plus cut compliance along with robust global demand has us on a healthy upward track.
In the antithesis of what was believed by many experts, we see the price rising for physical barrels of crude oil in many markets. At the same time fears that tankers of Saudi supply would soon overwhelm our oil infrastructure, U.S. exports are not soaring. Reuters reports, "U.S. crude oil imports remained very slow last week at just 5.2 million b/d, the second slowest rate since 1992, with no sign a large number of tankers off the coast carrying Saudi Arabia’s crude are discharging rapidly.”
Yet despite the comeback in oil and the bullish oil expiration of the June futures contract, there are reports that the USO (NYSE:USO) commodity fund is having issues after RBC capital is rushing the company not to buy any more futures contract after the debacle with the “Black April” crude oil crash. USO reportedly is looking for other brokers to do some of their business. Give me a call.
Still, total commercial stocks increased 5 million barrels, which was an all-time high, and oil did find its way into the Strategic Petroleum Reserve. Yet overall market action suggests a bottom. While it is getting overbought, the shorts are in trouble in the near term. The EIA confirmed that, “Producers were operating the fewest oil and natural gas drilling rigs on record in the United States at 339 on May 12, the lowest level in the Baker Hughes Company’s rig count data series that dates back to 1987. The number of active rigs began sharply decreasing in mid-March as crude oil prices fell: rigs have fallen by 56% (433 rigs) since March 17. Most of the decrease was in oil-focused geologic plays, but natural gas-focused plays also saw significant decreases.
Since March 17, 71% (308 rigs) of the rigs taken out of service were in the top three U.S. crude oil-producing regions: the Permian region in southeastern New Mexico and western Texas, the Eagle Ford region in southern Texas, and the Bakken region in Montana and North Dakota. Drilling in oil-focused plays has declined as the impact of mitigation efforts for the 2019 novel coronavirus (COVID-19) have caused declines in petroleum demand and the resulting fall in crude oil prices. In mid-March, the Permian region had 405 operating rigs. By May 12, that number had fallen by 57% to 175 rigs. The Eagle Ford and Bakken regions saw similar declines in their rig counts, of 64% and 69%, respectively, in that time.
Rig counts have also fallen in natural gas-focused plays, although those plays had fewer rigs. Earlier this year, the top natural gas-producing regions (aside from the Permian region, where much of the associated natural gas is produced in the United States and where all rigs are classified as oil-directed) were the Marcellus region in Ohio, Pennsylvania, and West Virginia and the Haynesville region in Louisiana and Texas. Drilling rigs in the Marcellus and Haynesville regions, which are exclusively natural gas rigs, declined by 23% and 26%, respectively, from mid-March to May 12. Changes in the number of oil rigs have historically followed changes in oil prices with a lag time of about four months. However, the current drop in rig count followed the recent decrease in the oil price much more rapidly than in the past. The spot price of West Texas Intermediate began March 2020 at $46.78 per barrel (b) and ended the month at $20.51/b; most of the decrease occurred in the first half of the month. The rig count began to decrease sharply in mid-March. The quick reduction in active rigs reflects the sudden loss of petroleum demand related to coronavirus-related mitigation efforts that also resulted in recent increases in the amount of crude oil placed in storage.
Similarly, natural gas rig activity has decreased along with the natural gas price. However, the decrease in natural gas prices has been over a longer period than oil prices; natural gas prices were already at multi-year lows in early 2020. Record-high dry natural gas production in November 2019, low demand because of warm weather, and relatively small withdrawals from storage during the winter heating season (November 1–March 31) have led to a sustained decrease in the natural gas price.
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