June 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended May’s gain when rising by $9.75 (+34.1%), to $38.31 per barrel in June. The May jump occurred within the context of a weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a nearly 3.6 million barrel-per-day (BPD) collapse in the amount of petroleum products demanded/supplied during April (to 14.7 million BPD), and a moderate increase in accumulated oil stocks (June average: 538 million barrels). 

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From the 6 July 2020 issue of The Energy Bulletin:

OPEC: The cartel’s oil production in June was at the lowest level since May 1991 during the Gulf War, and collectively meeting its promised cut. According to a Bloomberg survey, OPEC cut its output to 22.69 million b/d. Saudi Arabia met its promised cut, holding production to 7.53 million b/d. Saudi Arabia also met its additional voluntary reduction that phases out in July. While Kuwait and the UAE also met their promised cuts, they did not meet all of their voluntary cuts like Saudi Arabia did. To no one’s surprise, Angola, Iraq, and Nigeria did not meet their promised cuts. Of the three, Angola was the most compliant at 83 percent of its pledged cuts in June, while Nigeria hit 77 percent. Iraq remains the biggest laggard of the group.

Saudi Arabia has threatened to ignite an oil-price war unless fellow OPEC members make up for their failure to abide by the cartel’s recent production cuts, delegates said. Saudi energy minister Prince Abdulaziz bin Salman issued the ultimatum in recent weeks. He asked Angola and Nigeria to submit detailed pledges to carry extra oil-production curbs, delegates said. The hardline stance from OPEC’s de facto leader risks a new flare-up within the OPEC countries. It comes just months after Saudi Arabia waged a price war against longtime oil-market ally Russia following disagreements over how to supply global markets as the coronavirus spread.

OPEC+ is not discussing or planning changes to its production cut agreement, which should see the oil producers ease the cuts in August, Russia’s Energy Minister Alexander Novak said at an online conference on Thursday. OPEC+, led by Russia and OPEC’s top producer Saudi Arabia, agreed in June to extend the record production cuts of 9.7 million b/d by one month through the end of July. According to the original agreement reached in April, OPEC+ was to cut 9.7 million bpd in combined production for two months—May and June—and then ease these to 7.7 million b/d, to stay in effect until the end of the year. Then, from January 2021, the production cuts would be further eased to 5.8 million b/d, to remain in effect until end-April 2022.

Shale Oil: ConocoPhillips expects to start bringing back in July part of the oil production it had curtailed in the second quarter in response to the low oil prices. In April, when oil prices slumped to the low teens amid crashing demand in the pandemic and the Saudi pledge to flood the market with oil, ConocoPhillips reduced its 2020 capital expenditure for the second time in one month. They announced curtailment of some oil production in Canada and the US until market conditions improve. ConocoPhillips said it would voluntarily curtail 200,000 barrels of oil equivalent per day net until market conditions improve. The company reduced production at Surmont in Canada due to low Western Canada Select prices and production across its operations in US shale fields.

As much as 30 percent of shale drillers could go under if oil prices fail to move substantially higher, Deloitte said in a recent study, as quoted by CNN. The firm said these 30 percent are technically insolvent at oil prices of $35 a barrel. Right now, West Texas Intermediate is higher than $35 but not by much. Oil is currently trading closer to $35 than to $50—the level at which most shale drillers will be making money.

Banks have started cutting credit lines for shale drillers as they reassess their assets, and the products that they promised would be realized from these assets. According to calculations by Moody’s and JP Morgan, cited by the Wall Street Journal, banks could reduce asset-backed loan availability for the industry by as much as 30 percent, which translates into tens of billions of dollars.

Crude-by-rail shipments from the US Midwest to the West Coast fell 28 percent month on month to 157,000 b/d in April amid lower refining runs and plunging North Dakota oil production. The shipments were down from 211,000 b/d in April 2019. West Coast refineries would have an incentive to max out Bakken flows while prices are low, but a market source said the plants likely saw better waterborne prices from abroad. 

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

Crude oil hit four-month highs on Thursday (7/2), aided by a tightening market and a better-than-expected U.S. jobs report. The caveat is that the jobs survey took place before the latest Covid-19 wave and the associated closures. Analysts still expect oil to face resistance to any further gains. “Gasoline has carried the load on recovery and demand, and it’s not clear whether that could continue into August and September,” Andrew Lebow, senior partner at Commodity Research Group, told Bloomberg. Oil prices retreated during midday trading on Friday.

OPEC+ scheduled to ease production cuts. OPEC+ is scheduled to ease production cuts beginning in August, and sources told Reuters that the group will likely refrain from an extension. Saudi Arabia also reportedly put pressure on Nigeria to increase its compliance. On Thursday, Russian energy minister Alexander Novak reiterated that position. “At present, there are no decisions to prepare any changes…Next, under the current agreements we should have a partial restoration of the volume of reductions starting August 1,” he said, according to TASS.

Shale drillers squeezed by banks. Lenders have tightened credit by as much as 20 percent in the latest credit redetermination period.

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.