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Since mid-April, when the WTI prompt futures price visited negative territory, the US oil market has been on a quest to find balance to solve for impending storage congestion issues. That has been achieved through a series of changes including the transfer of barrels into the Strategic Petroleum Reserve, increased floating storage, the reversal of the Seaway pipeline, a redirection of Saudi Arabian imports to other markets besides the US, and most importantly through voluntary production curtailments by the US upstream community.
As the month of May comes to an end, announced crude and condensate production shut-ins have reached 1.2 mbd, while we have accounted for 1.3 mbd on average for the month in our models.
As a result, after nine weeks of builds that added over 28 million barrels to the hub, Cushing crude storage has drawn for three consecutive weeks implying balance in the US oil market is occurring
much faster than previously anticipated. This has been reflected through price, with the now prompt WTI futures contract comfortably above $30/bbl, a price level which the US upstream community has signaled would elicit the reintroduction of curtailed production.
During the 1Q20 earnings season, many in the upstream community have suggested that a crude price in the high $20s a barrel or low $30s may trigger a revival of curtailed output. Above $30/bbl to $35/bbl some producers have signaled that they would be likely to complete drilled but uncompleted wells (DUCs), while by $40/bbl other producers have stated that they may look to increase rig activity. Taking these cues, we have incorporated a new decline profile for US oil production as a result of the faster-than-anticipated rally in WTI price.
Foreseeing the puzzling swings in this energy commodity, we recommend long hedges of CME WTI of June tenors, simultaneously, shorts in CME WTI futures of July’20 delivery for the major downtrend. Thereby, one can ensure directional positions amid macroeconomic turmoil as emphasized in our recent posts. Courtesy: JPM
