It feels like just yesterday that crude oil prices crashed 300% in a single day to -$40. Since then, oil has gone from subzero to hero faster than you can say, “What the frack?” Despite much of the global economy still shut down and hundreds of millions of consumers under house arrest, crude has enjoyed an incredible rally, and analysts are calling for a second-half rebound. Could prices return to February levels later this year? Like everything else in financial markets today, anything is possible.
The Kingdom of Crude
In June, Saudi Aramco will slash its output by an extra one million barrels per day (bpd). Saudi Arabia’s Ministry of Energy told the Saudi Press Agency that the voluntary move would bring the nation’s total production cut to just under 5 million bpd from last month’s level. The government announced in a statement:
“The Kingdom aims through this additional cut to encourage OPEC+ participants, as well as other producing countries, to comply with the production cuts they have committed to, and to provide additional voluntary cuts, in an effort to support the stability of global oil market.”
Neighboring countries have said they would support Riyadh’s decision to assist in rebalancing global oil markets by also voluntarily cutting output. Kuwait and the United Arab Emirates (UAE) said they are committed to axing 80,000 and 100,000 bpd, respectively, next month.
While any little bit can help curtail the supply glut and storage capacities, you should not believe they are doing this out of the kindness of their hearts. This has more to do with a lack of demand for their products in the pandemiconomy and buying time until the demand recovery begins. Saudi Aramco recently announced a first-quarter slide due to a lack of buyers. The sector is still weighed down by a massive oversupply, so any mediocre cuts would do more to prevent storages from being maxed out.
In April, the Organization of the Petroleum Exporting Countries (OPEC) and its allies — OPEC+ — already agreed to decrease daily production by 9.7 million bpd until June.
Many factors have fueled the recent rally in crude prices.
Optimism over the U.S. and global economies reopening in the aftermath of the Coronavirus outbreak has been one of the chief drivers. If countries can return to some semblance of normalcy, it would lift demand and incrementally bridge the supply-demand chasm. However, there is some consternation over a second wave impacting several nations that are in the process of hitting the restart button, including Germany and South Korea, which have reported upticks in cases. Health authorities say the United States could witness a similar resurgence if states and municipalities relax restrictions and guidelines.
A sharp drop in U.S. production has elevated prices, too. According to the most recent Energy Information Administration (EIA) data, domestic output declined 200,000 barrels to fall below 12 million bpd. The Baker Hughes total oil rig count has also plummeted to just over 300. With more shale giants shutting wells and winding down operations, it is expected the EIA and Baker Hughes will continually highlight a downward trend in their weekly reports.
Because the United States has transformed into an energy powerhouse, a recovery in the sector depends on Saudi America.
For the last month, the business media have sounded the alarm about crude storage facilities — on land and sea — approaching near capacity. But several recent reports indicate that these fears were overblown, noting that levels are tightening. In the near-term, the decline in production and deregulatory efforts has been easing the pressure at these locations.
The Future of Oil
Peak oil. Bridge fuels. Green energy. Whether oil hits rock bottom or skyrockets to record highs, rumors of crude’s death are always greatly exaggerated. The prognostications never come true. The energy commodity is cyclical, trading between subzero and $125 per barrel this century. Unless scientists devise a perpetual-motion machine, there will always be a demand for crude, much to the chagrin of environmental zealots. Oil might have a different role in the post-Coronavirus economy as more people work from home and air travel evolves, but it will remain an imperative power source to lift developing nations out of poverty and keep wealthy countries rich. For the foreseeable future, oil is here to stay.
Read more from Andrew Moran.
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