A case for higher oil
Click here to go to the full PDF version of this issue, with any maps, photos or other artwork that appears in
some of the articles.
A recent downturn in oil prices is likely just a blip in a rising market
Fear is an emotion that can move markets. Fears of new COVID-19 spikes spooked oil markets the week ending June 26, contributing to a 3.4% decline in the West Texas Intermediate oil price.
WTI slid another 2.2% Monday June 29, and it fell another 1.1% June 30, to settle at $39.27 a barrel on the New York Mercantile Exchange. Reuters cited continued COVID-19 demand concerns and a potential resurgence of Libyan oil production as factors in June 30’s price action.
The other factor that moves markets, emotionally speaking, is greed. Greed is thought to move markets up, but the week ending June 26, it may have contributed in a roundabout way to oil price declines.
Concerns about rising inventories and storage capacity formed the other major issue which analysts widely blamed for that week’s price haircut.
Indeed, commercial crude oil inventories in the United States hit an all-time high of 541 million barrels as of the week ending June 19, which was 5 million barrels higher than the previous record set in late March 2017, according to data from the U.S. Energy Information Administration
Inventories have increased by 64 million barrels since March 13, and as of June 19, were at 62% of total available storage capacity, according to the EIA.
Greed encourages oil traders to store oil - if traders think oil prices will be higher later - and many traders are storing oil now. That trading exerted upward pressure on prices leading into the week ending June 26, along with buying by players like China and India which have been taking advantage of low prices to build up inventories.
Many traders have a wary eye on storage capacity; that seems to be retarding short term prices - against trader optimism for higher prices later in 2020 and in 2021.
A recent Reuters poll of analysts revealed expectations that oil prices will gain steam in the fourth quarter of this year, after consolidating at around $40 a barrel.
While COVID-19 is a wild card, recent price action is likely just a downdraft on a trajectory toward higher oil prices.
“As global demand recovers, oil’s natural inclination is to go higher, since current prices are below the economic threshold for most producers,” Manish Raj, chief financial officer at Velandera Energy, told MarketWatch per a June 29 article.
Internationally, China official statistics released over the June 27-28 weekend were bullish for oil. Industrial profits in China for May were up 6% year over year, the first increase in 2020. Higher OPEC compliance with production limits also is bullish for crude.
Harold Hamm bets on the futureContinental Resources Inc. Executive Chairman Harold Hamm has signaled a bullish outlook for the shale industry in the United States.
Hamm acquired 3,436,264 shares of the oil and natural gas exploration and production company he founded in 1967, paying $16.62 per share for a total amount of $57.12 million, according to a filing with the U.S. Securities & Exchange Commission.
The June transaction lifted Hamm’s direct stake in Continental by 197.24% - to 5,178,395 shares.
The 3.44 million shares bring Hamm’s total of direct and indirect shares to 288 million, or about 79% of the company, according to a report in the Houston Chronicle.
As fuel consumption picks up, Continental and others are reopening wells previously shut.
Hamm said oil prices above $40 per barrel would be needed to “recapitalize” the shale sector and prompt significant new drilling, according to a June 28 Financial Times article.
Oil prices may be range bound for a spell, however.
“WTI crude has not been able to do much after capturing the $40 level and seems destined to continue to consolidate between the $35 and $42 level over the next couple weeks,” OANDA strategist Ed Moya said after trading closed the week ending June 26. “The rapid demand rebound is not happening, but stimulus efforts, pauses in reopening of businesses, improved treatments for the virus are limiting the downward pressure on crude prices.”
But range bound prices may be adapted to by efficient operators of quality properties with appropriate technology. Additionally, the shakeout of weaker shale players is accelerating the consolidation of better properties into the hands of larger, more richly capitalized players.
“A material portion of the U.S. light oil supply is now controlled by supermajors and large independents with access to the core acreage and strong balance sheets.” said Artem Abramov, head of shale research at Rystad, adding that many of those players “can gradually adapt even if oil prices of $35-40 WTI stay around for longer.”
S&P Global Platts and Argus launched rival contracts the week ending June 26, to create an American benchmark to reflect international seaborne prices, rather than those at the Cushing, Oklahoma, delivery point for Nymex’s WTI futures contract.
Hamm said a new oil contract for the U.S. Gulf coast would put American producers on a more level playing field with Saudi Arabia and other rivals.
“We’re not going to be playing second fiddle for them,” he said. “They’ll never get past the blame of what happened, but they’re not going to be able to kill this industry.”
The automobile will lead the wayFollowing the 9/11 terrorist attacks in New York, oil and gasoline prices spiked briefly due to fears that oil production from the Middle East could be disrupted, but oil prices soon turned south, plummeting 20% as air travel was disrupted.
Travelers took to their cars, and it was gasoline that led the way to the recovery in oil prices.
Car gasoline is leading the way out of the current oil price slump as well.
Under the current scenario of coronavirus risks and social distancing, its logical that people may continue to opt for the use private automobiles over public transportation - and over airliners, especially for shorter trips.
That has been true in China. In May, the use of the subway in Beijing, Shanghai, and Guangzhou plunged by 53%, 29%, and 39% compared to the usage before the pandemic, according to Bloomberg.
After plunging below 5.5 million barrels per day in April, U.S. weekly gasoline demand continues to recover in June, rising from 7.9 million bpd on June 6 to 8.6 million bpd on June 19, according to the EIA. On June 21, 2019, the weekly demand figure stood at 9.5 million bpd.
Distillate fuel and jet fuel demand, however, is still struggling - especially jet fuel.
According to the Airlines Reporting Corp., airline transactions have fallen in the past two weeks.
For the week ending June 28, air transactions declined 77% year-over-year, versus a 76.5% decline for the week ending June 21. For the week ending June 14, air bookings were down 75.2%.
Air transactions had been on the rise since April 12, when transactions were down 93.8% year-over-year.
The numbers reflect shutdowns and caution as COVID-19 cases reports have increased.
In Texas, Gov. Greg Abbott has shut bars down again and cut restaurant capacity to 50%. He even shut down river-rafting trips, which have been blamed for a swift rise in cases.
But it is highly unlikely that Texans, or Americans will give up their cars, and they can’t stay in their homes forever.
In China, rush hours and traffic jams are back in major cities.
Electric cars may be the future, but for now, there is a large existing U.S. base of gasoline fueled cars ready to take to the road.