Oil Market rapid balancing - May 11

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On May 8 Reuters reported the number of operating oil and natural gas rigs fell to an all-time low - reflecting data going back 80 years - as the energy industry slashes output and spending to deal with the coronavirus-led crash in fuel demand. The rig count, an early indicator of future output, fell by 34 to a record low of 374 in the week to May 8, according to data on Friday from energy services firm Baker Hughes (BKR-NC) going back to 1940. The prior all-time low was 404 rigs in May 2016.

As of February, the latest month for which data is available, the EIA said U.S. crude output was 12.8 million b/d. Weekly figures show output has dropped to 11.9 million b/d, but that data is considered less reliable than monthly figures. In recent days, prices in physical markets have rebounded. The heaviest reductions are coming from Texas, the largest U.S. producing-state, with 5 million b/d of output. Texas output is likely to drop by 20%, or 1 million b/d, by the end of May, said Karr Ingham, executive vice president of the Texas Alliance of Energy Producers. "Operators are shutting in anywhere from 20% to 50%, and some more than that, based on what they think they can get to market," Ingham said.

In North Dakota, output has dropped by at least 400,000 b/d since March 1, nearly a third of the state's around 1.4 million b/d output before the crisis. State officials expect the volume shut to rise further. “This is worse than anything that any of us have ever seen,” said Pete Miller, former CEO of Houston-based National Oilwell Varco (NOV-NC), speaking on a call with investors Monday. ConocoPhillips has cut the most, saying it will reduce 460,000 b/d across the United States and Canada. Exxon Mobil announced worldwide cuts of roughly 400,000 b/d, with two-thirds of that from the two countries.

On May 7 Reuters reported North American oil companies have slashed production faster than skeptical OPEC officials and industry analysts expected, on course to cut roughly 1.7 million b/d by the end of June, according to a Reuters analysis of U.S. state and company data. During talks last month, some OPEC members raised concerns that nations like the United States and Canada couldn't muster that magnitude of cuts from private companies without state mandates. That hasn't turned out to be the case. Numerous producers in North America announced sizeable cuts, including ConocoPhillips (COP-NC), Exxon Mobil (XOM-NC), Chevron Corp (CVX-NC) and Canada's Cenovus Energy (CVE-NC). The United States and Canada, which produce more than 17 million b/d, have already cut output by about 10%, according to Reuters estimates.

"The power of the market can be ferocious sometimes," said a senior OPEC source, adding he was surprised at the speed of U.S. and Canadian supply reductions. They (OPEC) were concerned because U.S. producers have benefited from previous cuts by OPEC and Russia. While OPEC+ producers have been cutting production to raise prices since 2016, shale producers took advantage of those higher prices to pump more - effectively stealing market share. The United States has become the world's largest crude producer while OPEC and Russia kept output constrained.

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Saudi Arabia Deepens Oil Output Cuts in Effort to Prop Up Market

Bloomberg 8:30AM ET on May 11, 2020 -- Saudi Arabia announced a voluntary and unilateral cut of 1 million barrels a day in its oil production, bringing output to its lowest in 18 years, as the kingdom tries to prop up a nascent recovery in global energy markets.

Saudi Arabia aims to pump in June just under 7.5 million barrels a day, compared with an official target under the most recent OPEC+ agreement of 8.5 million barrels a day. If Riyadh makes good on its pledge, production will drop to the lowest since mid-2002, according to Bloomberg data.

“The Kingdom aims through this additional cut to encourage OPEC+ participants, as well as other producing countries, to comply with the production cuts they have committed to, and to provide additional voluntary cuts, in an effort to support the stability of global oil markets,” an official at the Saudi Ministry of Energy said.

Riyadh also asked state-owned Saudi Aramco to reduce its production in the current month of May “in consent with its customers”.

Oil futures rose on the news.

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Canadian oil faces an existential crisis. Canada has already shut in 644,000 bpd of production and debt is mounting, even for some of the country’s larger producers. “The balance sheets of some very good companies are not as strong as they should be,” Tim McMillan, president of the Canadian Association of Petroleum Producers, told Reuters.