This Week In Oil - April 19, 2020

Watch out for storage capacity

Here we are. One week after the OPEC+ announced a “historic production cut” oil prices are even lower. A week that started with WTI at $24.5 per barrel ended up at $18.3. So much for supporting oil prices…

We talked about it last week. Most of these “historic production cuts” are not actual cuts. They are just following natural reduction of production given the market conditions. You’ll see them referred officially as “organic production cuts”. And those kind of cuts don’t have any immediate effect.

And they are far from offsetting the crash in demand. The coronavirus pandemic is still raging. Most countries are in one form another still under lockdown. And countries that have already weathered the first virus wave such as China or Singapore are bracing for the second. 

The global supply chain is broken and that doesn’t bode well for a V shaped recovery of the demand.

The US in particular is still in total economic lockdown. This showed on the US oil data reported by the EIA this week.

US crude oil stocks change:

  • Historical build of +19 million barrels.

  • This is a 4.2 σ move.

  • We haven’t seen anything like that in recent history.

Cushing crude oil stocks change:

  • Very large build of +5.7 million barrels.

  • This is a 3.8 σ move.

  • Only second to last week historic build.

This lockdown situation is putting a lot of pressure on Cushing storage facilities. For the past few weeks we have seen Cushing building between +3 million to +6 million barrels per week.

The previous inventories record was set in 2017 when Cushing was housing close to 70 million barrels of oil. With an average +4.5 million build per week we’ll catch up with those highs in 3 to 4 weeks. And continuing at the same rate Cushing will be full in 4 to 6 weeks.

This situation is going to put tremendous pressure on WTI futures prices. That will for sure create an even steeper super contango configuration. 

The front month finished the week at $18 per barrel and a $3.5 spread with the Jun’20 contract. As storage becomes more tight in Cushing this will push the front month even lower. Watch out for this.

Whatever the truth of the drama between Russia and Saudi Arabia, this oil price war it is certainly working to hurt US oil producers. With so many US shale oil producers having weak financials and even weaker hedging Russia is probably looking at them as easy targets. I recommend you read this interesting article to dig deeper into the topic.

Two more weeks and the US oil rigs count is going back to its 2016 lows.

So what is going to drive the price in the coming week? Two things to watch:

  • The storage situation in Cushing. 

  • How long is the lockdown going to last in the US to gauge the evolution of the demand.