March 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil tumbled by $21.33 (-42.2%), to $29.21 per barrel in March; for perspective, this price drop was exceeded only by a $27.25 fall in October 2008. The March 2020 slump occurred within the context of a substantially stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 407,000 barrel-per-day (BPD) decline in the amount of petroleum products supplied during January (to 19.9 million BPD), and a jump in accumulated oil stocks (March average: 458 million barrels). 

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From the 6 April 2020 issue of The Energy Bulletin:

“Last week saw one of the biggest price leaps in the history of the oil industry, with U.S. futures surging from around $20 a barrel at mid-week to a close of $28.34 on Friday.  The surprise surge came after President Trump tweeted Thursday morning that the Saudis and Russia were going to cut production by “10 million barrels or may be substantially more.” The tweet came after Trump talked with the Saudi crown prince.  Later in the day, Moscow weighed in to say that it was unaware of such an agreement and that the Saudis were making every effort to increase, not cut oil production.

“Analysts and the IEA were quick to point out that the coronavirus pandemic had already cut global oil demand by an estimated 20-30 million BPD or possibly more.  In the unlikely occurrence that OPEC+ could agree on production cuts totaling millions of barrels, any agreement to cut output would likely be too late and too little.  The market is grappling with an enormous oversupply.  Vitol, the world’s largest independent oil trader, says demand is set to fall by as much as 30 million barrels a day in April.

…

“The U.S. shale oil industry is contracting rapidly, but it will be a couple of months before the EIA can sort out just how much production has declined.  Six weeks ago, the discussion was about how much slower the growth of shale oil production would be this year.  Now the issue is how much it might fall.

…

“As part of the $2 trillion fiscal stimuli meant to resuscitate the U.S. economy, Congress allocated $454 billion to help underwrite the special lending programs.  This could generate up to $4.540 trillion in new lending (assuming 10x leverage for highly-rated assets}.  It now turns out that the first industry to benefit from direct Fed loans is the U.S. energy sector, some of which is facing near-certain bankruptcy, assuring that new loans will never be repaid.

“Global spending on oilfield equipment and services this year is expected to fall 21% from 2019 to $211 billion, the lowest level since 2005, according to a report to be released on Wednesday by consultancy Spears & Associates.  Spears’ estimate for 2020 spending is below industry outlays at the nadir of the last price crash in 2016, and less than half the 2014 peak of $473 billion.  The company, which surveys oilfield firms, evaluates company reports and models sales, historically has not publicly released its data.

“Oil is entering a period of unparalleled demand destruction this month that promises to transform the industry for years to come.  Daily consumption is forecast to plummet by 20 million to 22 million BPD from a year earlier.  The crash has already led to refiners slashing processing, drillers halting output, and storage tanks swelling across the world. “This will likely be a game-changer for the industry,” Goldman Sachs analysts including Jeffrey Currie and Damien Courvalin said in a March 30th note.  “It is impossible to shut down that much demand without large and persistent ramifications to supply.” 

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Selected highlights from the 3 April 2020 issue of OilPrice.com’s Oil & Energy Insider include:

China’s refiners increase processing. China’s refineries have started to increase processing, with runs set to increase by 755,000 BPD in April, a 10% month-on-month increase.

Schlumberger to cut workforce. Schlumberger said that it would implement widespread salary and job cuts.

BP slashes spending 20%. BP said it would cut spending by 20%, including a 50% cut in U.S. shale spending. “This may be the most brutal environment for oil and gas businesses in decades,” CEO Bernard Looney said in a statement.

Gas inventories rise. Warmer-than-average temperatures along with demand destruction have led to a spike in natural gas inventories in Europe. “There’s a chance we will see a collapse in prices in the U.S.,” Francisco Blanch, head of global commodities and derivatives research at Bank of America, told Bloomberg. “We are going to be weak on the demand destruction related to the virus, but the real issue is that we had a very warm winter and we are coming out with extreme high inventories.”

U.S. DOE to allow SPR storage. After a plan to buy oil for the U.S. SPR fell through, the Department of Energy is going to open up the SPR for leased storage. There is roughly 77 million barrels of capacity available.

Trump considers import tariffs on oil. The White House is reportedly considering placing tariffs on imported oil as a way of throwing aid to U.S. oil producers. The plan has met strenuous opposition from refiners and even the API, an oil lobby group that some say reflects the interests of the oil majors.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.