By Barani Krishnan
Investing.com - Oil’s ‘choo-choo’ rally is chugging along, the velocity of its gains aided by a stunning drop in U.S. rigs. But some see another derailment in the market’s way, as demand for crude from an America reopening from seven weeks of lockdown isn’t quite enough to support prices near or above $30 a barrel.
“What we're seeing right now is the head fake before another surge in CV (crude volume) that pushes storage to maximum capacity & oil prices to new lows,” said a weekend tweet from Art Berman, who has nearly 22,000 followers on Twitter, made up mostly of oil and gas professionals.
A petroleum geologist-turned-investment analyst with over 35 years in the business, Berman specializes in the study of comparative crude inventory. In his words, the current rebound is “reminiscent of the March-June 2015 false oil-price rally, before markets accepted that things weren't going back to the way they were before”.
Berman lists five oil rallies from mid-2018 to this year that have failed: i. Iran export waivers in Oct 2018; ii. Attacks on ships in the Gulf in April 2019; iii. OPEC+ cuts extension in July 2019; iv. Saudi refinery attack in September 2019; v. OPEC+ extension, China-U.S. trade deal and Qassem Soleimani assasination.
“What are the odds for Rally #6?” he asks, predicting that U.S. crude’s potential run to mid $30 levels will be “followed by sub-$20”.
This isn’t to say that crude prices won’t experience another surge after the death of the current rally. The sheer collapse in U.S. oil rigs and anticipated well shut-ins mean the greatest mismatch in supply/demand will probably be behind us at some point, as Morgan Stanley suggests. But that’s for the future. The oil market’s problem, however, is the “now”. Supply builds are still too large compared to the trajectory of production losses, and that will eventually max out storage capacity. And that will kill the present rally before too long.
Rigs actively drilling for oil have fallen to lows not seen since the financial crisis, reaching 292 this week - a precipitous 57% drop from the 683 reading eight weeks ago. The trajectory of well shut-ins suggests that tight oil production may fall below 3 million barrels per day by June. Yet, crude builds have averaged 12.8 million barrels per week over the past six weeks - about four times above the norm for this time of year. While builds have slowed in Cushing, Oklahoma - the delivery point for expiring U.S. West Texas Intermediate crude contracts - the hub itself is just about 11 million barrels to hitting capacity. And most of the space in Cushing has been leased out already, according to those in the know.
The Trump administration is trying to push more U.S. crude into the Strategic Petroleum Reserve, where there’s still space in the underground salt caverns. But in the meantime, a lot more foreign oil is waiting to come into the United States.
Some 28 tankers with Saudi oil, including 14 VLCCs carrying a total of 43 million barrels, have started arriving on the U.S. Gulf and West coasts in stages.
The Saudi flotilla will join dozens more tankers waiting to unload in US ports. Thirty-four tankers are off the U.S. West Coast, laden with about 25 million barrels of crude. Another 31, carrying a similar load, are waiting to unload at the Gulf Coast.
The Trump administration is under pressure to slap tariffs or take other punitive action on the incoming Saudi oil to prevent them from adding to the U.S. glut. But that will be difficult considering the Saudis have already started “playing ball” with Donald Trump - by agreeing first to the new round of production cuts, then raising their official selling prices to Asia in a bid to get the broader market price of oil up (the strategy worked, adding to this week’s gains).
All this indicates that the timer has started on oil’s rally.
On the precious metals side, gold is likely to continue pitching for $1,750 - and falling short.
Even the worst U.S. jobs numbers in history couldn’t result in much of a safe-haven bid for gold for the just-ended week.
“Gold is continuing to hover around $1,700 as it continues to search for direction,” said Craig Erlam, strategist at New York-based OANDA. “It's been consolidating for much of the last month and today's price action doesn't suggest anything is going to change just yet.”
Gold lost out to stocks as the well closed amid optimism that the world’s largest economy will recover from the unprecedented blow dealt by the coronavirus.
Energy Markets Review
Crude prices ended with a second week of double-digit gains after the U.S. oil rig count hit financial crisis lows.
West Texas Intermediate, the benchmark for U.S. crude, settled Friday’s trade up $1.19, or 5%, at $24.74 per barrel.
For the week, WTI was up 25%, pushing through with the previous week’s near 17% gain as traders and investors bet on slumping oil production and nascent recovery in demand from a reopening of the U.S. economy from Covid-19 lockdowns.
“WTI is still the cheapest barrel to run in North America and tells me it should continue to perform,” said Scott Shelton, energy futures broker at ICAP (LON:NXGN) in Durham, N.C.
London-traded Brent, the global benchmark for oil, finished Friday’s session up $1.51, or 5%, at $30.97. For the week, Brent was up nearly 17%, after last week’s gain of more than 23%.
U.S. oil rigs, as measured by oil services firm Baker Hughes, fell by 33 this week to reach 292. The number had previously never fallen beneath 300, since the 2008/09 financial crisis.
The record low for U.S. oil rigs was 98, seen in November 2002. But a combination of oil and gas rigs, known as the total rig count, hit a record low of 374, after falling by 34 this week, according to Baker Hughes, which has been tracking those numbers since 1940.
Energy Calendar Ahead
Monday, May 11
Private Genscape data on Cushing oil inventory estimates
Tuesday, May 12
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, May 13
EIA weekly report on oil stockpiles
Thursday, May 14
Friday, May 15
Baker Hughes weekly rig count.
Precious Metals Markets Review
The Labor Department said another 3.17 million Americans lost their jobs for the week to May 2, bringing to more 33 million the number who have been laid off since the pandemic struck the United States in a big way.
Yet a rise in risk appetite for stocks drove down both gold and erstwhile safe-play, the dollar, despite ominous warnings that April’s jobs horror wasn’t over and that the U.S. economy will be even worse off in the second quarter.
U.S. gold futures for June settled down 11.90, or 0.7%, at $1,713.90 per ounce as Wall Street’s Dow S&P 500 and Nasdaq indexes all rose more than 1%, betting on U.S. business reopenings from Covid-19 forced lockdowns.
Despite the drop on the day, June futures for gold were up on the week, rising 0.4%.
Spot gold, which tracks real-time trades in bullion, fell $10.75, or 0.6%, to $1,705.84
Support pledged by Chinese trade negotiators for the phase-one of their trade deal with the U.S. also bolstered sentiment on Wall Street.
Friday’s reach out by trade officials in Beijing to their counterparts in Washington was the first since the deal was ratified in January. It also comes after blame heaped by the Trump administration on China lately for allegedly creating the coronavirus in a lab and spreading it to the world.
White House Economic Adviser Larry Kudlow, speaking on Fox Business, said he wasn’t sure if the Q2 U.S. jobs picture “is as bad as it gets”.
“I don’t think this pandemic contraction has yet fully run,” Kudlow said.
The consumer-driven US economy shrank 4.8% in the first quarter. While that was already the sharpest decline in a quarter since the 2008/09 financial crisis, economists predict that the current quarter would be worse, as the now mostly-reopened economy was unlikely to show much recovery until the July-September stretch.
* Disclaimer: Barani Krishnan does not own or hold a position in the commodities or securities he writes about.