By Barani Krishnan
Investing.com - To put it in crude language, another week after the most bizarre week in oil, many haven’t been able to figure out what the frack is going on.
The world of hydrocarbons isn’t easily understood by everyone, particularly those whose work doesn’t involve knowing the intricacies of commodities. But even regular energy traders and analysts have been in a daze over the past month with all the madness that’s been unfolding in U.S. crude and whether the “frackers” - the term comes from the hydraulic fracturing behind much of the oil glut now - will cut enough to support $20-and-above pricing.
Just when the oil bears thought the world belonged to them after the sub-zero prices of the previous week, the bulls have sprung back. U.S. West Texas Intermediate settled the just-ended week up 17%, denying another win to short sellers already cresting on a 40% triumph from three previous weeks.
A smaller-than-expected build in crude stockpiles and a surprise drop in gasoline inventories was fundamentally on oil’s side during the just-ended week. But the real catalyst for the market’s exuberance was remdesivir - the Covid-19 drug that had gotten Wall Street all in a tizzy (before the late-week slide in stocks, of course, on the realization that U.S. job losses weren’t going away or the economy wasn’t getting any better).
To be sure, the drug developed by Gilead (NASDAQ:GILD) Science isn’t a vaccine that could prevent one from developing coronavirus symptoms. It is meant for patients in ICU and is administered intravenously to reduce their typical time under intubation by about four days, or 30%, with the hope that they come out faster and - most importantly - don’t die.
The Food & Drug Administration has already fast tracked the remdesivir to market - i.e. hospitals - to be given immediately to the seriously ill. Whether this will dramatically scale down U.S. deaths from Covid-19 - growing by as much as 1,000 a day and already at above 66,000 — remains to be seen. But the drug gives a hope that wasn’t possible before and one can understand why that’s so important.
The other development rumbling in the underbelly of oil bulls is the reopening of the economy in more than half of the United States as people stagger back to some semblance of normalcy - whatever that means in today’s context - amid the threat of the pandemic, which is far from over.
Logic tells us that not everyone will be jumping into their cars or on board public transportation or planes from Monday as businesses reopen. But logic also tells us there will be more gasoline and diesel consumption as the lockdowns come off and that will prompt U.S. refiners to process more crude and all that will eventually show up in data released each Wednesday by the Energy Information Administration. How quickly the uptick will be evident and how strong the changes will be is the question.
But to offset optimism over the reopening, America’s top scientist on the Covid-19, Anthony Fauci, cautions against “leapfrogging” critical milestones on the pandemic set by medical experts.
“Obviously, you could get away with that, but you’re making a really significant risk,” Fauci, who’s director of the National Institute of Allergy and Infectious Diseases, said. “If you follow the guidelines, there’s a continuity that’s safe, that’s prudent and that’s careful.”
More troublingly, he adds:
“There’s no doubt in my mind that when you pull back mitigation, you’re going to start seeing cases crop up here and there. If you’re not able to handle them, you’re going to see another peak, a spike, and then you almost have to turn the clock back to go back to mitigation.”
How will that advice go with the rifle-brandishing crowd in Michigan, described by President Donald Trump as “good” but “angry” people, who want Governor Gretchen Whitmer to reopen the state right way despite her finding that it isn’t ready based on its growing number of cases and deaths? Will more rebellions, spurred by the president’s “Liberate!” call, lead to unrestrained openings across America and stronger pickup in fuel demand?
There are no definite answers to these. Just as there isn’t to whether the economy will be “rocking” by July, as the president’s son-in-law, Jared Kushner, wants us to think. Or whether the third quarter at least will be positive, as Larry Kudlow, another adviser to Trump, wants us to believe. We can all agree on one thing though: the second quarter will be quite a disaster, making the 5% drop just reported for the first quarter pretty forgettable. The U.S. jobs report for April, due on Friday, might be the next shoe to drop on the economy.
The other major uncertainty for oil is how long it will take for the OPEC-led production cuts — which officially began Friday - to drain the global storage system of the millions of barrels stored in Cushing, Oklahoma, in the underground salt caverns of Strategic Petroleum Reserve, and in Very Large Crude Carriers and land tanks across the world.
The so-called GLOPEC cuts will include reductions by Russia, the United States and — if it is to be believed — even Mexico. Officially, the target is to cut 9.7 million barrels per day from world supply. But Saudi Energy Minister Abdulaziz bin Salman and Trump think it could be as high as 20 million bpd, bringing it closer to the max demand loss of 30 million bpd estimated from the Covid-19. Media reports presaging the event don’t give the market much optimism though. Bloomberg data on Friday showed the Saudis pumped a record of more than 11 million bpd last month as they waged their price war with Russia. OPEC’s total crude production, meanwhile, surged by the most in almost 30 years in April.
All this brings us back to the fracking fields.
Despite voluntary production shut-ins, cuts in oil rigs and reductions in capital expenditure announced by various oil drillers, the EIA says U.S. crude production stood at 12.1 million bpd last week - down by just 1 million bpd from the record high of 13.1-million-bpd in mid-March.
It suggests that U.S. oil drillers have also become victims of their own success in recent years, by achieving admirable drilling efficiency from fracking in their shale fields.
“The US upstream sector is currently deploying 325, or 79.84%, fewer drilling rigs but producing 3,225,000 bpd, or 36.3%, more oil than in October 2014,” said Dominick Chirichella of the Energy Management Institute in New York.
In the case of gold, volatility could keep the yellow metal caught in a fairly tight range of between 1,690 and $1,710 for most of the week, with the final outcome depending on Friday’s April nonfarm payrolls report. The market is expecting a loss of 21,000 jobs for last month. If the decline overshoots, expect gold to reach around $730 or higher.
Energy Review
WTI crude futures struggled to keep a floor beneath a three-day rebound, as traders and investors looked for fresh signs that production cuts, well shut-ins and rig losses were biting in a bigger way on the country’s highly-efficient oil fracking system.
Just a week earlier, U.S. crude prices were struggling to stay in double digit territory on fears the United States will run out of place to store oil from all the piled-up supply since the country went into lockdown to curb the spread of the Covid-19. Slower crude builds since have eased some of the storage fears, helping WTI rebound.
June WTI settled Friday’s up 94 cents, or 5%, at $19.78 per barrel, after hitting a two-week high of $20.45 earlier. For the latest week, it rose 17%.
Brent, the global crude benchmark, meanwhile, slid on Bloomberg data showing that OPEC’s crude production surged by the most in almost 30 years last month as its biggest members fought to dominate a global market devastated by the coronavirus crisis.
July Brent settled down 4 cents, or 0.2%, on Friday at $26.44. For the week, it rose 24%.
Energy Calendar Ahead
Monday, May 4
Private Genscape data on Cushing oil inventory estimates
Tuesday, May 5
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, May 6
EIA weekly report on oil stockpiles
Thursday, May 7
Friday, May 8
Baker Hughes weekly rig count.
Precious Metals Review
Gold back to its $1,700 perch as President Trump threatened China with fresh tariffs after suggesting Beijing’s irresponsible handing of its coronavirus pandemic was what led to the major outbreak of the virus in the U.S.
Gold futures for June delivery on New York’s COMEX settled up $16.05 or 0.9%, at $1,710.25 per ounce. For the week, it fell nearly $35 or 2% as risk appetite returned to Wall Street earlier in the week on signs of relative progress in clinical trials for a Covid-19 drug meant for intubated patients.
Spot gold, which tracks live trades in bullion, last traded at $1,700.37 on Friday, up $13.79, or 0.8.%. It fell 1.7% on the week.
Trump said late on Thursday his trade deal with China, the first phase having been signed only in January, was now of secondary importance to the pandemic, which he blames Beijing for.
“Gold’s bullish outlook mainly comprised of the growing stimulus efforts from the central banks worldwide, but now it seems it could also be supported by tariff wars between the world’s two largest economies,” said Ed Moya, analyst at OANDA in New York.
But Moya also said gold’s stay at $1,700 wasn’t tethered and volatility to the downside was possible.
“Throughout past market crashes, gold typically loses its safe-haven appeal during the panic-selling phase but resumes it once the recovery starts to take form,” he said. “The US economy is too vulnerable right now, so President Trump will likely not follow through on these latest tariff threats.”
Joshua Graves, senior market strategist at RJO Futures in Chicago, had a similar view, saying the most important level to watch for gold bugs to watch was the recent high of around $1,790.
“Unless this level specifically is taken out you can’t make a case for a bull run beyond that,” Graves said. “There must be something new that develops to give the bulls a boost and a stock market selloff won’t do it. We’ve seen that before.”