Energy Prospectus

Opening Prices:
> WTI is up 21c to $36.55/Bbl, and Brent is up 30c to $38.85/Bbl.
> Natural gas is down 1.9c to $1.794/MMBtu.

Closing Prices:
> WTI prompt month (JUL 20) was down $0.08 on the day, to settle at $36.26/Bbl.
> NG prompt month (JUL 20) was down $0.082 on the day, to settle at $1.731/MMBtu.

Oil price charts have very few smooth lines. We are in the "Roller Coaster" phase of the rebound where traders over-react to each day's headlines. Last week's rise in U.S. crude oil inventories was the result of a spike in imports as U.S. production continues to decline. Spike in imports was the result of (a) a surge in cheap "oil price war imports" from Saudi Arabia and (b) tankers offering refiners discounts so they could unload early in the week to get out of the way of Tropical Storm Cristobal. We may see a draw from storage next week as Cristobal shut down a lot of GOM ports from Saturday to Monday.

Note from Raymond James 6-11-2020
This week's petroleum inventories update was bearish relative to consensus. "Big Three" petroleum inventories (crude, gasoline, distillates — including SPR) rose by 10.4 MMBbls, versus consensus estimates calling for a build of 1.8 MMBbls and a seasonal draw of 3.8 MMBbls. Turning to crude, total inventories built by 7.9 MMBbls (excluding the SPR, a draw of 5.7 MMBbls), versus consensus calling for a draw of 1.0 MMBbls and a normal seasonal draw of 3.2 MMBbls. Refinery utilization rose to 73.1% from 71.8% last week. Total petroleum imports were 8.9 MMBbls per day, up from last week’s 8.0 MMBbls per day. Total petroleum product demand increased 16.6% after last week’s 5.6% decrease. On a four-week moving average basis, there is a 20.2% y/y decrease in total demand.

Oil prices have been working their way up from the epic trough set in April. There are three key drivers for this bounce.
> First, the OPEC+Russia deal has been in effect since May 1, and last week the “crisis-mode” level of cuts was extended through July. Compliance in the first month was stronger than expected, though we predict cuts will ultimately be less ambitious than the official targets.
> Second, price-related production shut-ins in the U.S. and elsewhere have also been needle-moving.
> Third, and most importantly, the COVID-related disruptions in transportation and economic activity continue to subside.

Having been tracking economic reopening policies in 80 countries, here is the key datapoint: of the 4.28 billion people who have been under a lockdown at some point since January, 4.20 billion (98%) already have some reopening. Based on our definition of “reopening concluded” as everything up to and including all retail and restaurant dining rooms, for at least a substantial portion of any given jurisdiction, that total currently stands at 3.18 billion (74%). Transportation recovery is confirmed by traffic congestion data, as well as commentary by refiners. While it may not be realistic for demand to get back to pre-COVID levels until 2022, it is clear that the impact peaked in April, with 3Q expected to be much better than 2Q, and 4Q better than 3Q. The 12-month futures strip is at $39.86/Bbl for WTI and $42.76/Bbl for Brent, having moved in recent weeks from contango to a nearly flat profile.

A Beaten-Down Commodity Ready to Surge... Again
By Keith Kohl
Written Jun 12, 2020

Today is a special day here in the Old Line State.

A few days ago, Maryland’s Governor, gave us the news that we’ve been impatiently waiting for over the last three months.

It’s time to re-open.

With a plan in hand, he laid it all out.

Restaurants will open their doors at 50% capacity, Go-Kart engines across the state will roar to life, and the most enthusiastic miniature golf pros like Christian Dehaemer will finally be able to walk back on the greens.

Well, not quite yet. We have to wait until 5 p.m.

And if you were hoping to go to the gym, roll some bones at the Maryland Live! Casino, or walk your circuit around the mall, you’ll have to wait another week.

Oh yes, dear reader, we are nearing the end of this 2020 pandemic craze.

Granted, that’s assuming there are no major setbacks.

Look around, and you’ll find 50 different plans to re-open each state.

Yet, it’s going to take one thing to kick-start the U.S. economy and get things back to some semblance of normalcy.

Energy… and a lot of it.

A Beaten-Down Commodity Ready to Surge
From a demand standpoint, things couldn’t have gotten much worse for oil.

Just think, the U.S. expects electricity demand will fall to its lowest point in 11 years this summer. Consumption in the commercial and industrial sectors is expected to decline by 12% and 9%, respectively.

That makes sense, doesn’t it? After all, we’ve been shut down and cooped up since March 30. You can already guess how it affected gasoline demand across the country.

Just take a look that nosedive for yourself: The chart shows a decline in gasoline demand from 9.5 million bpd in March to 5.5 million bpd in April and a rebound to 7.5 million bpd in May.
That’s what happens when the lanes are all clear on the 405 in Los Angeles

Perhaps we can look at China for clues about how the U.S. recovery in oil demand will go. China’s oil demand rebounded to 13 million barrels per day during May, more than 16% higher than the first quarter. In fact, China’s oil demand is only 2.5% lower than it was compared to the previous year. That’s what we can expect after measures were taken to open their economy back up.

Are we going to see a similar rally for U.S. consumption?

Maybe.

One thing’s for sure, it’s going to be one helluva ride up.

Here’s why…

Putting it All Together
To give you an idea of how bad things got during this pandemic, remember that we consumed an average of 21.8 million barrels per day of petroleum products during the first week of March.

Demand plummeted by 34% within a month.

The EIA’s report, on Wednesday, showed that demand has rebounded to 17.5 million barrels per day last week.

Keep in mind that this occurred while most states were locked down.

That’s what it’s looking like.

Global oil consumption increased by nearly four million barrels per day in May –– much better than what the EIA was projecting.

So the question remains: What will the real recovery look like in the United States?

Will the oil markets balance out sooner than expected?

I’ll let you decide that for yourself. Before you make that call, try not to forget the other side of this fundamental equation.

And I have to tell you, it’s hard not to be bullish.

Not only did we see a new extension of OPEC+ cuts, but U.S. output has fallen to around 11 million barrels per day. < From 13 million bpd in March.

Our production is going to fall further, too. Throughout this pandemic, we’ve watched as drillers started to tighten their belts by radically slashing their capital spending.

The E&P sector has been idling drilling rigs faster than you can wash your hands.

Today, almost 700 FEWER drilling rigs are operating in the United States compared to a year ago.

We are finally beginning to be seeing the light at the end of this COVID tunnel and oil prices are still under $40 per barrel.

An ocean of oil will remain locked in the United States’ tight rock formations at that price.

And it’s going to open up a wealth of opportunities for the right drillers that turn a profit in these dark times.

We’ll take a look at one of them next week.

Stay tuned.

Until next time,

Keith Kohl Signature

Keith Kohl

I get Keith's newsletter "Energy Investor". In his Top Ten picks are Matador Resources (MTDR), Diamondback Energy (FANG) and Plains All American Pipeline (PAA).

This is classic GS. They first say oil prices are too high then the say this:

"Goldman Sachs told clients that it raised its Q3 and Q4 Brent price outlook to
$37 and $43 per barrel from $30 and $38 per barrel, respectively, while
maintaining above-consensus 2021 and 2022 outlooks of $56 and $60 per barrel.
The price targets have an average of 15% total return potential as producers
now move into the recovery phase from the bottoming phase, the bank said."

All of my forecast models are based on $50 WTI after 2020, but I think the "Right Price" is over $65/bbl.