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Oil Prices Are Up, But Here's The Truth About Demand, Supply And Earnings

By Ellen R. Wald, Ph.D.CommoditiesMay 07, 2020 05:07AM ET
www.investing.com/analysis/oil-prices-are-up--but-heres-the-truth-about-demand-supply-and-earnings-200523904
Oil Prices Are Up, But Here's The Truth About Demand, Supply And Earnings
By Ellen R. Wald, Ph.D.   |  May 07, 2020 05:07AM ET
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In the last week, the oil market saw some minor positive news, including signs that demand numbers might be turning around while supply has dropped. But the positive news is limited and tempered by negatives as well.

At the same time, public oil companies, which just recently reported earnings for their latest quarters, have been providing the first taste of just how devastating this oil price crash has been for the industry. Below, a realistic look at where demand, supply and oil equities stand now.

1. Demand

Oil prices rallied a bit this week with Brent finally crossing the $30 mark.

Brent Monthly Chart
Brent Monthly Chart

The price movement seems to have been driven by the fact that some areas in Europe, the U.S. and elsewhere are starting to ease restrictions on economic activity and movement. Traders have seen these tentative reopenings as steps towards economic recovery and higher oil demand. But it’s not clear yet if data support this.

In the United States, gasoline stocks declined last week, indicating a boost in gasoline demand, and oil refineries increased their utilization rates to 70%, but these are just two data points. Globally, oil refineries have slashed production by 30%, so a slight rise week-on-week in the U.S. may not be significant—particularly as oil inventories continue to climb higher.

Even when businesses reopen, gasoline use will be lower compared to the same time last year, because many people will continue avoiding unnecessary travel, have less money to spend and a struggling economy sees less transportation of goods and workers.

2. Supply

Another factor bolstering oil prices is the ongoing supply contraction.

Crude WTI Futures Monthly Chart
Crude WTI Futures Monthly Chart

Last week’s column looked at the various moves oil producers have made to rein in supply, but the situation is changing rapidly. Russia has traditionally lagged in decreasing production even when it has committed to do so. There were serious doubts that it would be able to comply with the new cuts it promised to make in May and June. However, according to data from Reuters for the first five days of May, Russian oil production dropped to 8.75 million bpd (this number does not include condensate production), which brings Russia’s production up to 9.5 million bpd.

Production in the U.S. continues to sink, but it is unclear by how much. According to the EIA, U.S. production tumbled another 200,000 bpd last week to 11.9 million bpd. Even though the Texas Railroad Commission decided not to regulate oil production in the state at this time, the organization estimates that production from Texas alone has already dropped by 1 million bpd since the start of the demand crunch. (For more on this decision, listen to this interview with Texas Railroad Commissioner Christi Craddick).

Falling production is a good sign for oil prices, but traders shouldn’t get too excited just yet about contracting supply. Iraq has committed to slash 1 million bpd, but has yet to inform customers of supply reductions and has not decided how cuts will be distributed amongst the companies that operate fields within the country. Talks are ongoing with the oil companies that operate Iraq’s largest fields (such as BP (NYSE:BP), Exxon (NYSE:XOM), ENI (NYSE:E) and Lukoil (OTC:LUKOY)), but it does not appear that production is being curtailed.

In the shale patch, two prominent companies, Diamondback (NASDAQ:FANG) and Parsley Energy (NYSE:PE), recently indicated that if oil prices (WTI) reach $30 per barrel, they could start to raise production again by reopening closed-in wells and even by fracking new wells.

3. Oil Equities

Many oil companies released earnings over the last two weeks for the first quarter of 2020. Of the 13 weeks in the quarter, only the last 3.5 saw extremely low oil prices.

Nevertheless, a significant number of companies reported major losses in an industry that usually only sees profits. For example, Exxon reported a loss of $610 million; BP lost $628 million; Occidental (NYSE:OXY) reported a loss of $2.2 billion; and Marathon Petroleum (NYSE:MPC) lost $9.9 billion. First quarter losses of this scale indicate that oil companies are likely to make even deeper cuts to operating expenses and capital expenditures to try and stem the drop in earnings over subsequent quarters.

Occidental, for example, just announced an additional round of reductions to operating and capital expenditures after cutting back twice in March. The company has now lowered its planned spending by 50% compared to what it previously indicated it would spend in 2020. A deeper reduction will mean less development of future oil resources and less supply from these companies in the long-term.

Oil Prices Are Up, But Here's The Truth About Demand, Supply And Earnings
 

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Oil Prices Are Up, But Here's The Truth About Demand, Supply And Earnings

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Comments (29)
John Juterbock
John Juterbock May 10, 2020 11:23AM ET
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I was stuck in traffic on the high for the first time in 53 days snd also if anyone is curiouus... I was stuck in traffic on the high for the first time in 53 days snd also if anyone is curiouus flying has increased in passengers https://www.tsa.gov/coronavirus/passenger-throughput
Steve Candido
Steve Candido May 10, 2020 9:53AM ET
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Steve Candido
Steve Candido May 10, 2020 9:52AM ET
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Martyn Clement
Martyn Clement May 10, 2020 5:31AM ET
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why so the price of the oil decreases
Kaveh Sun
Kaveh Sun May 09, 2020 2:09PM ET
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Shale oil cost 40usd to produce. Lots of shale oil producers go n will go out of business. Supply is reducing natually. Saudi can pump oil at 10usd a barrel. Saudi can flush out shale producers and raise the price.
Mein Ki
Mein Ki May 09, 2020 9:50AM ET
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Did you notice? Friday May 8th, 2020 WTI stoped at Feb 2016 EXACTLY! That means WHAT? And WHY?
블리 기
블리 기 May 08, 2020 9:51AM ET
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So what??
Tony SK Lai
Tony SK Lai May 08, 2020 9:25AM ET
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Golden age passed over.
ליעד אלקובי
ליעד אלקובי May 07, 2020 1:20PM ET
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I actually agree with Ellen's demand and supply analysis.  As stocks are full and claiming, the level of demand is not clear (but it will be less than before), there can be a reversal in the oil price in the short term.
Darko Shaka Zulu
Darko Shaka Zulu May 07, 2020 11:56AM ET
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So much negative energy over oil. Fact is, while the while world was confined at home, we didnt need it that much. Fact is that in April some really *smart* ppl decided they want to wage oil wars, and the price we have today, is the result. But 2 of 2 is pretty much over, so we go back to normal with demand around 15% less then what we had on peak in february, but we also have cuts that r pretty much the same 15 %. Then, we have full storages, all around the world, for like what? 14 days? And the price in february was 55-60, now its 25, and EVERYONE is.. Oh so high, we will have another May futures... Contango is super high, etc, etc. Just negative energy. No, we wont have another May, no more super Contango, so pls, stop with your doomsday analysis, everything is fine. This time next month we have 35$ oil.
Periklis Skavaras
Periklis Skavaras May 07, 2020 11:56AM ET
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What about the June contract? Are you confident that it will stay as it is? IMO it will also go negative close to expiration and from July there will be a comeback..
Mark Maxwell
MaxAnalysis May 07, 2020 11:56AM ET
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oil is an obsolete energy solution that also happens to be toxic to the planet when burned as fuel.. the entire automotive industry is moving towards electrification, the more oil we leave in the ground the better, oil prices will remain low indefinitely
Alan Rice
Alan Rice May 07, 2020 11:47AM ET
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$30/25 / bbl ?? the Deepwater Horizon continues...l
Alan Rice
Alan Rice May 07, 2020 11:42AM ET
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MINIMUM production time for Brent and WTI= approximately 65 MILLION YEARS. 30/25
Jo Riley
Jo Riley May 07, 2020 11:42AM ET
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Darwin's myth of macro-evolution (a theory in crisis) creates fairy-tale time periods like "65 million years." Real science looks at the millions of dead things, buried in rock layers, all over the earth (from which you get oil) and understands that a global flood over a short period of time makes much more sense.  Interesting that many cultures have global flood stories - most embellished with legend.  The Biblical account appears void of fiction.
Ambi Shiva
Ambi Shiva May 07, 2020 11:27AM ET
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nothing clear
Arnav Kumar
Arnav Kumar May 07, 2020 11:18AM ET
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trade oil for a long term investment ....within 1 year expect oil price to be over 50$ er barrel(wti)...and in 2 year around 80 -100$
Mark Maxwell
MaxAnalysis May 07, 2020 11:18AM ET
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oil is obsolete.. demand will never recover and soon the world will move to fully electric cars using solar and natural gas to generate the energy
Mike Birky
Mike Birky May 07, 2020 11:18AM ET
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Mark Maxwell  yea, good luck with that idea. Remember it takes power plants run on coal or gas to produce consistent electricity. Solar while nice, will never fully power transportation.
Robert Koch
Robert Koch May 07, 2020 11:11AM ET
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Oil is a long term investment right now. Find an oil company with a stong balance sheet that can tread water until this passes and make lots of money when it does. Or, be a short term investor and get out now before it dips again. Simple as that.
Mark Maxwell
MaxAnalysis May 07, 2020 11:11AM ET
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oil will never recover before it's mostly phased out over the coming decade
Mohan giri
Mohan giri May 07, 2020 11:07AM ET
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Thank u for your posative infarmation its give us hope
Brian Foll
Brian Foll May 07, 2020 11:06AM ET
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But now that quarantine is ending more and more shouldn't we assume people will be driving more so in 60 days this could be twice as high?
Mark Maxwell
MaxAnalysis May 07, 2020 11:06AM ET
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bad assumption, the glut will take 12 months or more to erase without more drastic production cuts , inventory continues to grow
Utkarsh sinha
Utkarsh sinha May 07, 2020 11:05AM ET
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Thanks but multiple dat on actual production is not there. All is from sone sources like reuters but again the sources dont give good and complete data, seems more of estimation than anything else. Can we get some more real data please to i prove upon it. You have done a great work! Sou
Kevin Lewis
Kevin Lewis May 07, 2020 11:05AM ET
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I think all you have to do is drive around and see that traffic is picking up. That's an obvious indicator that demand is rising. Sometimes a little common sense goes a long way...
Brian Foll
Brian Foll May 07, 2020 11:05AM ET
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thank you!!!!! plus political turmoil raises prices too and next month the candidate conventions start
Shantavoto Yo
Shantavoto Yo May 07, 2020 10:17AM ET
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Thank you for this information! Is it possible to explain what this spot price:  https://www.investing.com/currencies/wti-usd and the incredible difference from the current futures, which today reached 17 dollars.
Akshay Maheshwari
Akshay Maheshwari May 07, 2020 8:03AM ET
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I did the mistake of deciding my trading decisions based on analytical articles posted on this site once.. Did not repeat that again today.. And guess what. I earned today.. You analyst are perma bears.. Look at the world, its opening again.. People have been standing on shorts of 10 dollar based on your "timely articles"..
nawaf abdullah
nawaf abdullah May 07, 2020 7:37AM ET
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Your view is covering oil market and make a clear shape for who is following your Articles.Thank you.
emad hijazi
emad hijazi May 07, 2020 7:27AM ET
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Thanks
Arthur Lynn
Hoppel May 07, 2020 6:16AM ET
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Thank you for your commentary.
Brendon Hosay
Brendon Hosay May 07, 2020 6:11AM ET
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Once again thank you Dr. Wald.
 
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