Improving outlook sends oil prices near $30
Growing optimism is offering support to crude prices, which have more than recovered from the negative $37.63 recorded on April 20.
Prices are now approaching the $30 level, gaining $1.87, or 6.8 percent, to close at $29.43 per barrel Friday on the New York Mercantile Exchange. For a brief period Friday, the near-month June futures contract was higher than the next-month July contract for the first time since mid-March.
“The market is beginning to normalize given the demand situation, but we remain in an oversupply situation,” economist Ray Perryman told the Reporter-Telegram by email. “There may be some noise next week as contracts expire on May 20, but it should not be as disruptive as the prior one.”
With a number of producers citing $30 oil as a price that could stimulate some increased activity, Perryman said, “I don’t think that prices around $30 are going to stimulate much production at present. The situation remains highly uncertain, and that price level remains at the lower end of what makes sense for most producers. Because of the OPEC++ agreement and the cuts we are seeing in response to the current environment in the major shale areas in the US, Canada and elsewhere, we only have to regain 40-50% of the lost demand to restore the market to more orderly functioning and prices to more sustainable levels. That should happen as things open up over the next few months.”
Jay Young, president and chief executive officer of King Operating Corp., a privately owned oil and gas company, cited several factors for rising crude prices.
He said in an email that the U.S. rig count is down almost 70 percent from a year ago, while U.S. production has dropped from 13.1 million barrels of oil per day to 11.6 million barrels per day in two months and will continue to decline throughout 2020.
In the geopolitical arena, “Saudi Arabia and Russia did what they set out to do: They flooded the market with oil and drove prices down. They obviously did not know the pandemic and decreased demand would hurt prices. They are trying to put oil companies out of business. They also do not want prices this low forever, so they will sell oil at higher prices in the future,” he said.
All this is setting the stage for a “HUGE supply problem by the end of 2020 and first half of 2021,” he said, listing the following reasons:
–U.S. oil companies are shutting in wells, and high-pressure oil wells – shale wells – do not come back and produce as they did before.
–The reason U.S. oil production has increased from 6 million barrels a day to 13 million barrels per day is because of shale wells in three basins: Permian, Eagle Ford and Bakken. These wells typically decline up to 60 percent in their first year of production.
For these reasons, Young said, U.S. production will “decline and we will be searching for oil.”
Bloomberg reported that members of the Organization of Petroleum Exporting Countries are optimistic that the worst of the oil crisis is over and they see signs that the global economy is starting to recover. China’s industrial output increased in April for the first time since the coronavirus outbreak, signaling economic recovery aided by government stimulus efforts. Meanwhile, states in the U.S. are beginning to ease lockdown measures.
Stockpiles at the key U.S storage hub in Cushing, Oklahoma, fell last week for the first time since late February.
Still, Bloomberg reported, oil prices remain down more than 50 percent this year and demand is far below pre-virus levels, but BP Plc sees evidence of consumption rising, and the International Energy Agency said the market’s outlook has improved. Additionally, Saudi Arabia will slash supply to its customers around the world in June as part of OPEC and its allies’ record production cuts.