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Oil Prices Are Now Rising But 3 Issues Could Drive Future Volatility

By Ellen R. Wald, Ph.D.CommoditiesApr 23, 2020 05:31AM ET
www.investing.com/analysis/oil-prices-are-now-rising-but-3-issues-could-drive-future-volatility-200522420
Oil Prices Are Now Rising But 3 Issues Could Drive Future Volatility
By Ellen R. Wald, Ph.D.   |  Apr 23, 2020 05:31AM ET
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The big news this week was that oil futures turned negative on Monday as the May contract for the American benchmark, WTI, was about to expire. This was not unexpected and reflected the fact that storage prices climbed too high for sellers stuck with May delivery.

Crude Oil WTI Futures Monthly Chart
Crude Oil WTI Futures Monthly Chart

Prices for delivery in June and later months are elevated but remain extremely volatile. Will oil market skittishness continue? Three issues are worth watching to determine what may happen next:

1. U.S. Storage Matters, But So Do Production Numbers

Much of the focus for America’s oil situation has been on storage rather than production. While storage capacity is important, it isn’t the only significant metric. It just happens to be much easier to measure than production in the United States.

The U.S. Energy Information Administration (EIA) reported an increase in stored crude oil of 19.2 million barrels for the week of April 10. This is higher than what API predicted but doesn’t dramatically alter the expectation that storage capacity in the United States—which excludes the Strategic Petroleum Reserve or SPR—will reach capacity sometime in May.

Once commercial storage is full, companies may begin renting space in the government owned SPR facilities. In fact, the Department of Energy is looking at renting space in its Gulf Coast storage caverns to 9 different companies to store 23 million barrels of oil. That would still leave the U.S. SPR with 55 million barrels of space.

These numbers shouldn’t overshadow what we are learning about production declines. According to the EIA report for the week of April 10, output in the U.S. declined 100,000 bpd to 12.3 million bpd. More producers are reporting that they are shutting in production. One small offshore producer said it has shut in 20,000 bpd of production that could be offline for as long as two years.

However, it is important to remember that anecdotal evidence may not be reflective of the larger situation. Measuring the decline in U.S. output is challenging because production in the U.S. is reported to the EIA voluntarily and not all producers participate. Weekly data should be interpreted as reflective of a general trend.

2. Where Is Saudi Oil Going And Will They Cut Beyond Their Commitment?

Saudi Arabia increased its production in April to its maximum rate of 12 million bpd, but it has committed to cutting production down to 8.5 million bpd in May. There is still uncertainty over whether Saudi Arabia actually signed contracts to sell all of its April production. According to the Saudi oil minister it has, but Aramco officials have indicated that this is not the case and Aramco will have tankers full of oil stranded with nowhere to go. As I wrote earlier this month, we could see another price crash if it is conclusively determined that Saudi Arabia could not sell its April oil.

New reports are that Saudi Arabia has already started to cut production to get down to the 8.5 million bpd it has committed to for May. But the market has decided that Saudi Arabia’s committed cut isn’t enough, particularly given its massive overproduction in April. Pressure is mounting for Saudi Arabia to slash production faster and more drastically. Every time oil prices drop significantly, voices out of Saudi Arabia claim it is considering deeper cuts with OPEC+, but these words mean nothing to the market. If Saudi Arabia is left with unsold oil from April, will that finally compel it to make deeper cuts?

3. U.S. Oil Producing States Consider Regulation Measures

U.S. states including Texas, Oklahoma and North Dakota are considering regulating oil output. Each of these states has its own regulatory bodies that could mandate some degree of production cuts for oil producers within their jurisdiction.

The important issues they are considering include (a) whether regulating production will hurt oil and gas infrastructure investment in the long run, (b) whether state regulations are necessary when market conditions are bringing production down organically and (c) whether mandating production cuts would hurt or help the economic viability of companies and the oil industry as a whole.

Last week, the Texas Railroad Commission held a hearing on the subject where numerous companies spoke in favor or against proration and answered questions from the three elected commissioners. Earlier this week, the commissioners decided to put off the decision to prorate (the term used by states to regulate production) or not until May 5.

Two out of the three Texas commissioners oppose prorationing, while one of the commissioners favors cutting oil production by 20% for companies producing over 1000 barrels per day (based on a company’s self-reported, most recent monthly production data). However, that commissioner predicated his support for these imposed cuts on whether other oil producing states also agreed to regulate production cuts. In other words, at least one Texas commissioner wants to see what Oklahoma and North Dakota do.

Oklahoma regulators decided in a 2 to 1 vote that some unprofitable oil production can be classified as “economic waste.” This could be a first step towards issuing production limits on companies, though at this point the decision will be used by producers to maintain leases on wells that they decide to shut involuntarily. Oklahoma will hold a hearing on prorationing on May 11.

On Tuesday, the North Dakota Industrial Commission decided not to declare oil produced at an economic loss as “waste.” North Dakota is not yet considering limiting production, but it is watching Texas and Oklahoma and could entertain the possibility. According to the Director of the North Dakota Department of Mineral Resources, the state is issuing well waivers that allow companies to voluntarily shut wells. North Dakota has received requests for waivers for 5,000 wells, which it estimates could result in a drop of 295,000-300,000 bpd in production.

Although the case for states to regulate oil production is stronger now than before, it seems unlikely that Oklahoma, Texas and North Dakota will decide to take what is widely seen as a drastic measure. The state regulators may be able to avoid the decision and let market forces bring down production naturally. However, if one state regulatory body does decide in favor of prorationing, others might follow.

Oil Prices Are Now Rising But 3 Issues Could Drive Future Volatility
 

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Oil Prices Are Now Rising But 3 Issues Could Drive Future Volatility

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Comments (13)
Greg Holzer
Greg Holzer Apr 27, 2020 2:27PM ET
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you sure prices are rising?
Tiago Henrique Henrique
Tiago Henrique Henrique Apr 24, 2020 8:39AM ET
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the analsys of oil is in damage,because yours level of deficit it"s so higher,but the influency of determinated countries come doing good results to propely as another countries the mode of company adering extrite situations,for me the oil nener stop and never give-up to production for more results satisfatory the governamental could higher the prices of the oil for assure the more oil in large scals in the future the same exampl the production...!
Siyabonga Mdalana
Siyabonga Mdalana Apr 24, 2020 8:39AM ET
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hey Tiago, in over my head, my name is Sia, just started demo trading and I have no idea of what I'm doing, can you advise on what to read or follow. need help seriously
MURSON CAPITAL INC
MURSON CAPITAL INC Apr 24, 2020 1:06AM ET
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she is best writer ever here ...she has a lot of knowledge ...thanks for your opinion
Jay Khaye
Jay Khaye Apr 23, 2020 9:09PM ET
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Standard Oil still calls the shots.  Chevron, Exxon/Mobil want to scoop up reserves for cheap.  Just part of the Globalist cabal/
MUHAMMAD ASLAM
MUHAMMAD ASLAM Apr 23, 2020 2:29PM ET
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Professional analysis
Ali Al Hassan
Ali Al Hassan Apr 23, 2020 11:36AM ET
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I hope the USA would participate in regulating cuts. It has the highest production level. Its unfair to expect all other countries to force cuts while the US waits for market driven cuts.
Ali Bransford
Ali Bransford Apr 23, 2020 11:09AM ET
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this is why I love reading from a Ph.D. well organized thoughts and research. ty.
Steve Silvers
Steve Silvers Apr 23, 2020 9:42AM ET
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The three states need to get together and stop "watching" each other for gods sake.  If I were the Department of Energy head I would get all oil producing state representatives together and come up with something that would be comparable to OPEC but internal to the US.  Then with that leverage I would confront OPEC, Russia, and all the other independent oil producing countries to come up with a formula that would use the price of production, world oil supply needs, storage capacity and levels, and come up with production quota's per oil producing country with limits on the price of oil fluctuation.  Something like a price range that oil suppliers must stay within and purchasers of oil must pay.  This would level out the ups and downs and reduce the friction currently in the oil markets.
Matthew Bredow
Matthew Bredow Apr 23, 2020 9:09AM ET
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If they do not see the current environment requiring "drastic measures" I do not feel sorry for them. They should not rely on the government to bail them out. they're cutting their own throats
ian manro
ian manro Apr 23, 2020 6:06AM ET
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The CFTC/ FBI investigation taking place now, because this was not unexpected, as you put it?
Peter Watson
Peter Watson Apr 23, 2020 6:06AM ET
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You are right I monitored that situation in real time there were no buying marketmakers in the order book and the professional traders pushed price lower and lower that caused the negative price and more than 300% per a day. I just can suspect that was an organized market manipulation. It would be better if a special commission will investigate that.
 
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