May 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil bounced off April’s low when rising by $12.01 (+72.6%), to $28.56 per barrel. The May jump occurred within the context of a marginally weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a nearly 1.6 million barrel-per-day (BPD) decline in the amount of petroleum products demanded/supplied during March (to 18.2 million BPD), and a stabilization of accumulated oil stocks (May average: 531 million barrels). 

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From the 1 June 2020 issue of The Energy Bulletin:

Oil closed out May…on hopes demand for oil would continue to rise as economies reopen and crude production continues to fall. The status of the U.S.-China trade agreement is in doubt as relations continue to deteriorate and resurgence of the coronavirus as lockdowns are lifted will be a significant factor in the movement of oil prices during the next few weeks.

The major issue is how long it will take for the oil markets to balance.  The IEA estimates that demand for oil in May was down on the order of 25 million BPD from May of 2019 and that June’s demand will be down by 15 million. The increase in demand this month is based on the relaxation of restrictions in the U.S., Europe, India, and China. However, large sectors of demand, such as air travel, shipping, tourism, sports, and entertainment are unlikely to be much affected by the relaxations. New spikes in the virus, however, are certain to result in enhanced restrictions or more public reluctance to resume non-essential activities. Moreover, the coronavirus is spreading rapidly in many parts of the underdeveloped world which is bound to have a significant impact on economic activity and imports of non-essential products.

There are two parts to the oil supply story. First is the OPEC+ agreement to curtail 9.7 million BPD through June and 7.7 million through December. The other is the ongoing decline of U.S. shale oil which could amount to 5 million BPD or more by the end of the year.

OPEC oil output hit the lowest in two decades in May as Saudi Arabia and other members started to deliver a record supply cut.  A Reuters survey found that on average, the 13-member Organization pumped 24.77 BPD in May, 5.91 million BPD from April’s revised figure.

Saudi Arabia and several other members of OPEC are discussing the possibility of extending the current level of OPEC+ production cuts to the end of the year, but Russia could be the stumbling block. OPEC and allies will hold online meetings on June 9-10 to discuss if they should extend their production cuts or start tapering them. Russia is said to be determined to start easing oil output cuts in July, as agreed by OPEC+ in April.

Availability of storage for the excess crude production is still an open question. U.S. crude oil stocks grew by nearly 8 million barrels the week before last, but this may have to due to the “Armada” of Saudi oil tankers that were dispatched to America back when Saudis were waging a price war with Russia. Some analysts believe that the oil storage crisis is far from over. Ships full of crude are still anchored off the coasts of the U.S., China, Europe, and elsewhere. With most onshore storage sold out and refinery run rates across the globe still a long way off their usual pace, storage could still be a problem.

US shale oil production is falling so fast that even the EIA can’t keep up with the decline and has been making downward revisions to its production forecasts in recent weeks. U.S. oil production has fallen 12 percent since early March to 11.4 million BPD, according to the Energy Information Administration. These numbers should be suspect until final production numbers are available in about six weeks.

Drilling is now at the slowest pace in more than a decade as the pandemic-driven collapse in energy demand wipes out cash flow, jobs and entire companies. Drillers idled 15 oil rigs across the U.S. last week, bringing the tally to 222, the lowest since 2009, according to Baker Hughes. The Permian Basin of West Texas and New Mexico accounted for the bulk of the reduction, with 14 rigs taken out of service.

Oil companies have abandoned drilling programs and tossed out financial forecasts in the wake of the spiral that saw American crude prices turn negative in April. Bankruptcies are accelerating among the most heavily leveraged drillers, and even major oil companies such as Chevron are cutting jobs and adopting austerity plans to conserve capital.

The gap between the oil and equity markets and the real economy continues to widen. Over 40 million people have filed for unemployment. Corporate bankruptcies are accelerating. A real estate crisis is forming, with millions of people and thousands of businesses unable to pay rent and mortgages.

Consulting firm Rystad Energy is telling traders that the oil market was oversupplied only by around 16 million BPD in April so that the rapid shut-in of around 12 million BPD has erased a huge portion of the surplus. The supposed rebound in demand – of around 4 million BPD, according to Rystad – puts the market close to “balanced” in June. Such optimism, if true, gives traders a reason to push oil markets higher, but others are not so sure.

Oil prices are back at levels last seen in mid-March, prior to the shutdowns. “We find it hard to justify why prices are where they were on 11 March,” Standard Chartered wrote in a note last Tuesday. “We do not think expectations about the future have brightened significantly since this date.” The investment bank noted that the IEA’s projection for global demand in March was a slight decline of just 90,000 BPD for 2020. Now, the agency’s estimate is for demand to decline by 8.63 million BPD, “96 times more than the estimate on 11 March.” And yet, oil prices are trading in the mid-$30s, just as they were in March. 

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Selected highlights from the 29 May 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Oil prices have held onto the gains from the last few weeks, but the recent rally seems to have stalled as demand shows signs of not returning to normal any time soon. Meanwhile, U.S.-China tensions weighed heavily on financial and commodity markets this week.

U.S.-China tensions threatens $52 billion in energy sales. The Phase 1 trade deal between Washington and Beijing is at risk of falling apart. President Trump is set to make a major announcement on Friday regarding China, and amid escalating tension and China’s moves in Hong Kong, the actions will likely be punitive. China had previously pledged to make $52 billion in oil purchases over two years, a total that was always going to be hard to meet.

What will OPEC+ do next? Two conflicting reports surfaced this week, one claiming that Russia was considering extending the OPEC+ production cuts beyond June, while the other said the opposite – that Russia would push for loosening the cuts. Saudi Arabia appears ready to extend, but in Moscow some Russian oil companies may find an extension difficult.

Refineries hit by overcapacity. A wave of refining capacity built over the past few years has squeezed margins, and the downturn in the oil market could push uncompetitive facilities offline permanently.

Bearish EIA data halts momentum. The EIA reported a jump in crude oil inventories this week, made worse by a surge in imports. At the same time, production dipped by another 100,000 bpd.

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.