By Barani Krishnan
Investing.com - “Phoenix Oil” has risen from the ashes of sub-zero pricing. But how soon it gets to the next lofty state of $40 per barrel will depend on how well “Reopen America!” delivers on its gasoline promise for WTI.
In a commodities story possible only in oil, both New York-traded West Texas Intermediate and London’s Brent posted their best month ever for May, with the U.K. benchmark rising nearly 100% from historic lows. More remarkable was the U.S. crude gauge’s 180-degree swing from -$37 in mid-April to settle at near $36 four weeks later.
But beyond the hallowed tales of May, greater challenges await oil bulls.
Data shows that U.S. producers, enticed by higher prices, have started slowing down on the output cuts that catalyzed the price rebound of the past month. That could be a problem for the nascent recovery the market has seen thus far, particularly if demand doesn’t catch up as quickly as thought.
The latest weekly survey of oil drilling patches by industry firm Baker Hughes showed a reduction of only 15 oil rigs, versus drops more than 60 per week several times during the past 2-½ months.
To be sure, the U.S. oil rig count is down 68% since the week ended March 13, sending crude production down to an estimated 11.4 million barrels per day from record highs of 13.1 million bpd just three months ago. But the pace of decline has slowed in recent weeks, indicating that drillers were holding back on cuts as the surge in crude prices lure them to put out more barrels in return for more cash.
Also, weekly balances on U.S. crude tracked by the Energy Information Administration showed a rise of nearly 8 million barrels for the week ended May 22, the biggest rise since the end of April.
Gasoline stockpiles, meanwhile, fell by a relatively-smaller 724,000 barrels during the same week, versus a forecast build of 100,000.
Worse, distillate inventories rose by 5.5 million barrels, gaining nearly 42 million barrels over the past eight weeks. Distillates, which include products such as diesel and jet fuel, have been the weakest component of the U.S. oil complex since the Covid-19 outbreak. Even with reopenings from the lockdown, demand for diesel and jet fuel has been anemic due to few people having returned to taking public transportation or flights due to lingering fears about infection.
Much of the crude rally in May was driven by cuts in oil rigs and well shut-ins by U.S. drillers responding to the collapse in fuel demand, which drove WTI to sub-zero prices at one point.
Larger production cuts by OPEC, which aims to remove 9.7 million barrels per day from global output, have also helped. A Reuters survey on Friday indicated that the cartel and its allies have made good on nearly three-quarters of the intended cuts by May, slashing almost 6 million barrels daily.
Even so, some analysts said the market was still some way off to achieving normalcy, and prices were frothy after five weeks of non-stop gains.
“I am struggling to get excited about anything lately (as are many of my clients),” ICAP crude futures broker Scott Shelton wrote in the Friday note circulated from the Durham, N.C. office of the brokerage.
“It’s been a good run for a lot of people who are now apparently sidelined and waiting for a mistake before getting involved again,” Shelton added. “This lack of interest strikes me as one of the reasons why there is a great deal of randomness in the flat price as of late in oil and that may continue in the near term.”
But offsetting the slowdown in production cuts was evidence that many U.S. oil drillers were still distressed by the demand destruction caused by the pandemic, and could go belly up without more demand. That doesn’t mean they will not continue producing. U.S. bankruptcy laws are unique in the sense that they allow companies protection while they continue operating and restructuring. Still, the psychological impact of bankruptcies could perversely help extend oil’s rally.
Earlier this week, Tulsa, Oklahoma-based Unit Corp became the third U.S. oil driller to file for bankruptcy in the aftermath of the Covid-19 that left it with debt of more than $650 million. Prior victims that fell to the pandemic were Whiting Petroleum (NYSE:WLL) and Diamond Offshore Drilling (NYSE:DO).
Still, Unit Corp said it expected to continue operating regularly through the Chapter 11 bankruptcy process without material disruption to its vendors, customers, or partners. It also said it expected to emerge from the process “with a $180 million exit financing facility”. Welcome to the world of steady to higher U.S. production hereon.
In the case of gold, the yellow metal finished above $1,700 an ounce for the first time in nearly 8 years on Friday, and also higher for a third straight month, as renewed U.S. tensions with China sent risk-averse buyers steadily toward the safe-haven.
Remarks by Federal Reserve Chair Jay Powell that full U.S. economic recovery from the Covid-19 could not be attained until people felt confidence to resume living like before the pandemic also helped boost gold prices on Friday.
“Gold has everything going for it except strong physical demand,” said Ed Moya, analyst at online trading platform OANDA. “Gold should remain supported in the short-term as central bank buying is strong, prospects for further global stimulus seems very likely, and as friction remains high between the world’s two largest economies.”
Energy Markets Review
New York-traded West Texas Intermediate, the benchmark for U.S. crude, was up $1.78, or 5.2%, at $35.49 per barrel, erasing early weakness in the session that pushed WTI to as low as $32.26 at one point.
Brent, the London-traded global benchmark for oil, rose by $2.55 cents, or 7%, to settle at $37.84. The session low for Brent was $34.83.
For May, WTI was up 81% while Brent rose 96%. Both benchmarks are still down more than 40% on the year, as crude markets struggle to regain the demand loss of up to 30% experienced during the height of the coronavirus pandemic.
Energy Calendar Ahead
Tuesday, June 2
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, June 3
EIA weekly report on crude stockpiles
EIA weekly report on gasoline stockpiles
EIA weekly report on distillates inventories
Thursday, June 4
EIA weekly report on natural gas stockpiles
Friday, June 5
Baker Hughes weekly survey on U.S. oil rigs
Precious Metals Markets Review
U.S. gold futures for June settled up $23.60, or 1.4%, at $1,736.90 per ounce. It was the first settlement above $1,700 for gold futures since November 2012. For all of
May, gold futures rose just shy of $43, or 2.5%, for its third straight monthly gain.
Spot gold, which tracks real-time trades in bullion, was up $13.82, or 0.8%, at $1,733.04 by 3:45 PM ET (19:45 GMT).
Gold’s run-up in May was largely supported by the surge of U.S. stimulus spending to contain the economic damage from the coronavirus pandemic, and a fresh ramp-up in American-Sino tensions, which turned more investors toward the safe-haven.
The Covid-19 has prompted the U.S. Treasury and Federal Reserve to unleash the largest fiscal response in U.S. history to an emergency, approving and disbursing trillions of dollars in loans, grants and outright aid to both businesses and individuals to shield them from the country’s worst economic downturn.
On the U.S.-China front, President Trump, who spent most of May blaming the Xi administration for the global spread of the coronavirus, withdrew on Friday a number of special privileges granted to Hong Kong to retaliate against Beijing’s move to pass new security laws for the South Chinese island territory.
* Disclaimer: Barani Krishnan does not own or hold a position in the commodities or securities he writes about.