The Best Cure for Low Oil Prices is Low Prices

May 20, 2020 08:46 AM
June WTI futures contract pricing stayed positive through expiration
API data shows Cushing inventory fell by 5 million barrels
What to look for in today's EIA report
The Energy Report



The Phil Flynn Energy Report 

No June Swoon 

What happened to the WTI futures contract’s June swoon? After oil prices crashed on the May contract expiration, the clearing firms and exchanges were all ready for a repeat subzero performance. Even the CFTC, in a rare warning to all commodity firms, said to be prepared for what could have been another disaster. 

There were, of course, good reasons for those concerns. Some firms took a substantial economic hit on the crash to subzero prices. To not be prepared for a potential repeat wouldn’t have been wise. What the crash to subzero valuations in May and a massive rally in the June contract teaches us is that the best cure for low prices indeed is low prices. I'd admit that minus $40.00 a barrel was an extreme case, but it does show once again the power of the markets and how if prices got low enough, it would stave off an oversupply disaster that in crude oil everyone was convinced was bound to happen.

The crash to negative $40.00 a barrel was, in part because, based on projections, the Cushing, Oklahoma storage hub would be tapped out and overflowing with unwanted crude oil. Yet when prices got so low, it was a call to action to avoid another crash disaster. Not only did we see a record pullback in U.S. oil production of a historical scale, but we also found oil storage where we thought there was none. OPEC, scared to death by the thought of negative oil prices, are seeing record speed in compliance with the agreed-upon production cuts. The U.S. also opened up the Strategic Petroleum Reserve to companies looking to fill storage.

In Cushing, instead of overflowing, we see considerable draws in supply. The latest API data shows that amount in Cushing fell by a significant 5 million barrels. That helped the overall crude inventory drop by 4.8 million barrels last week. A smaller than expected draw of 651,000 barrels in gasoline and a 5.1 million barrel increase in diesel supply is tempering extreme bullish enthusiasm. Still the come back from negative $40.00 a barrel to a positive $32.00 plus a barrel is a reminder that the markets can make what was seemingly impossible, now possible.

Oil is getting a bounce on another report of Russian compliance to the OPEC + cuts. Reports say that Russia's oil and gas condensate output has fallen to 9.42 million barrels so far in May, down from 11.35 million barrels a day in April. Russian oil companies are appealing to Russian President Vladimir Putin for a bailout or relief from paying taxes. It will be interesting to see if Putin grants their request. Remember that is was Russian oil companies that were responsible for the production war in the first place.

The number one thing to look at in today's EIA weekly report is gasoline demand. Increases in gasoline demand and the relative refinery rates have caused demand for high yielding WTI crude. Number two is U.S. oil production numbers and how far the number has fallen. Next, U.S. refinery runs and gasoline production. Will refiners keep up with escalating demand? The answer will provide great trading opportunities. While we may see corrections it’s clear that we’re going to see the market move towards balance much quicker than many people think.  

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.