Crude oil is finding support as production cuts continue while demand picks up, reports Phil Flynn.
Just when everyone was getting prepared for oil to go back to zero, the other shale dropped. The Coronavirus drop in demand forced what now is being confirmed by the Energy Information
Administration (EIA) as the most significant shale production setback ever. Production in the seven most active shale basins will fall to 7.822 million barrels-per-day (bpd), the EIA said, down from 8.019 million bpd this month. That 87,00 barrel drop is a record monthly loss. The most significant part of that decrease will be in the shale sweet spot, the Permian, which is expected to fall by 87,000 bpd to 4.290 million bpd. The Eagle Ford basin is also going to fall by 36,000 bpd in June, to 1.174 million bpd. This puts U.S. shale production at the lowest level since 2018 and based on the fact that last week's U.S. rig count fell to a record low, does not look to get better anytime soon.
Early reports of OPEC compliance to the agreed-upon record 9.7 million bpd production cut are impressive. Reports show that Russia, usually a laggard, has already achieved 93% compliance with reductions. Mexico, who had to be dragged, kicking and screaming into a cut agreement is at a 98% compliance rate. Azerbaijan is at 60%. Oman at 58% and Kazakhstan has some work to do at 39% compliance to cuts. It is not just crude oil that is seeing sharp production declines; it is natural gas as well. The EIA is predicting that natural gas production will fall by 779 million cubic feet per day.
This record pullback in production comes as oil demand is coming back faster than anticipated. China is reportedly at pre-virus demand levels, and Europe and the United States are seeing sharp increases in oil demand. Low oil prices may be greasing the wheels for fast economic recovery, but we had better enjoy it because we most likely will have a big price spike because we have seen some long-lasting damage to some oil producers.
Tuesday the oil market was looking to more soothing words from Fed Chairman Jerome Powell, who was giving testimony remotely to the Senate Banking Committee. In prepared remarks Powell wrote, "We are committed to using our full range of tools to support the economy in this challenging time even as we recognize that these actions are only a part of a broader public-sector response, we expect to maintain interest rates at this level until we are confident that the economy has weathered recent events and is on track to achieve our maximum-employment and price-stability goals.”
This kind of talk is also supportive to oil. Low-interest rates and low oil prices mean that oil prices will not stay low for long. While we may see some setbacks along the way, don't fight the Fed and don't fight the Trump Administration that is openly rooting for higher oil prices.
Gas prices are on the go as Americans again start to hit the road. Diesel prices are lower. Dan Ronan at Transport Topics wrote that the average price of diesel fuel nationally dropped eight-tenths of a cent last week to $2.386 a gallon from $2.394, according to the Energy Information Administration’s May 18 report. The price of trucking’s main fuel is now 77.7 cents a gallon less than it was a year ago. Meanwhile, national average price of gasoline continued going in the other direction, rising 2.7¢ per gallon to hit $1.878. That's still 97.4¢ per gallon cheaper than a year ago. Diesel dropped in all 10 regions according to the EIA report.
Meanwhile, the price of oil jumped 10.4% on May 18 to $32.74 a barrel for the benchmark West Texas Intermediate crude oil. Still, the cost of crude is less than half of its 52-week high of $65.65 a barrel.
