An almighty collapse in US oil production is coming – it could continue to trickle out, as it has been doing in the past three weeks, or it will arrive quickly in a couple of weeks in May with a rush of cuts from companies large and small.
These will be in addition to the 9.7 million barrels a day cut announced by OPEC, Russia and several smaller producers, and on top of cuts already factored in for the US, Norway, Canada
But it is coming in the US – last week’s near-record plunge in the number of rigs looking for oil in the US guarantees it.
In its regular report on Friday, Baker Hughes reported that the number of active rigs drilling for oil in the US dropped by 66 to 438 last week. That was the fifth straight weekly declines and suggests that oil production is headed for a sharp and early fall. The number has fallen by 126 in a fortnight.
In fact, the number of rigs at 438 is down 205 from March 20 this year and 415 or nearly 50% from the year-ago figure of 853 oil rigs.
Including gas rigs, the fall is more dramatic.
US production is already down around 600,000 barrels a day according to the Energy Information Administration (EIA) to 12.4 million barrels a day
According to Reuters, US and Canadian energy companies have lopped around 730,000 barrels of oil equivalent per day (boepd) in the past couple of weeks, with the largest coming from ConocoPhillips last Thursday with a cut of 200,000 boepd.
Along with Chevron, which slashed its output in the Permian basin by 20% or 125,000 bpd, and Occidental Petroleum, which reduced 2020 output by 85,000 boepd, the three companies account for 410,000 boepd of the reductions announced by US and Canadian companies, Reuters reported.
As well, other cuts have come from BP of about 70,000 boepd this year, (a 14% drop from its 2019 output of 499,000 boepd) and Cenovus Energy, one of Canada’s largest oil companies, which has revealed production cuts of 40,000 to 45,000 bpd.
The EIA says US production could drop as much as 1.7 million bpd from fourth-quarter 2019 to the fourth-quarter of this year. However, the EIA expects production for the year to average 11.8 million bpd in 2020, down 500,000 bpd from 2019. Daily production at the end of this year could be as low as 10.5 to 10.6 million barrels a day.
Reuters said Canadian production cuts already amount to at least 325,000 bpd, and analysts estimate that 1.1 million to 1.7 million bpd could be shut in eventually; the country currently produces roughly 4.5 million bpd, most of which is in the oil sands of the western province of Alberta.
The Canadian government late last week announced $C2.5 billion in support spending and other measures to help ease the strain on the sector.
Meanwhile, there is a big distortion at the moment in the futures market that is impacting on the price of US West Texas crude.
The nearby May futures contract for US crude oil fell on Friday to its lowest settlement price since early 2002 as it nears expiration (next Tuesday), reflecting fears over a global glut and tight storage space in the US. But June Brent futures rose on Friday.
US crude stocks rose to 508 million barrels, up 18 million barrels in a week and 10% above where it stood last year. It’s this figure that is worrying traders and these fears will continue to the expiration of the contract next Tuesday.
In short, there’s too much oil now available in the US and looking for a home and that has pushed down the price of the very short term prices.
West Texas Intermediate contracts for delivery later in 2020 (the out months) are trading at much higher prices than the front-month May contract, which expires at end of Tuesday’s session.
“There is significant disparity between prompt price movements and contracts only a few months further down the forward curve,” with the July WTI contract trading around $12 higher than the May contract, said Robbie Fraser, senior commodity analyst at Schneider Electric.
“The opening of this increasingly steep contango is a clear sign of a physical market under heavy stress, with light oil storage in the U.S. filling up at a record pace and oil flows routing back into the Cushing,[Okla.] hub,” he said in a market update.
West Texas Intermediate crude for May delivery (the nearby month) lost $US1.60, or 8.1%, to settle at $US18.27 a barrel in New York after trading as low as $US17.31.
Marketwatch.com said the intraday price was the lowest front-month intraday level since November 2001 and the settlement was the lowest since January 2002, according to Dow Jones Market Data. For the week, the contract was down roughly 19.7% from last Thursday’s finish. Last Friday was a holiday for the market.
The June WTI contract lost 50 cents, or 2%, to $25.03 a barrel, revealing a contango curve—a situation in which out month contracts trade above the nearby.
This contango “highlights the lack of storage availability as long positions rush to get out instead of risking taking delivery of barrels they cannot store,” Ole Hansen, head of commodity strategy at Saxo Bank told Marketwatch.
This is a signal of an oversupplied market and is placing further pressure on producers to cut their output. Storage space is becoming more expensive for buyers and producers and will become increasingly so.
Next Tuesday the May contract rolls over into the new nearby month, June. What traders are looking for is the price to bounce back to $US20 or more. But many expect the price to bounce, then fall because demand is weak and too much oil is available.
The difference between the US crude futures market and Brent was underlined on Friday Brent crude for June delivery extended gains from Thursday, to climb 26 cents, or 0.9%, to $US28.08 a barrel.
But still fell 10.8% for the week. The question is – does the Brent price represent global levels or is the WTI price in the US more accurate of oil price/demand at the moment and the next month or so?
Could the start of a gradual re-opening of the US economy help support oil – the steep contango curve tells us the answer to that question is a ’no’ for the moment.
AEST Midday update:
US crude oil prices fell more than 20 percent as trading reopened on Monday, crashing below $15 a barrel for the first time since 1999.
The latest slump, which has seen US oil prices hit a succession of lows, comes as the coronavirus pandemic has slashed global demand as much as a third, and led to warnings about storage filling up within weeks.
