Cruel Summer? - Is the Crude Market Headed for an Ugly Replay of This Spring?

The crude oil market may be approaching another rough patch, with the trajectory of the COVID pandemic and OPEC+ again poised to inflict a double whammy on U.S. producers. For the past couple of months, refinery demand for crude has been rebounding as the U.S. has made tentative steps toward reopening. Over the same period, domestic production of oil declined and then flattened out, and now appears to be headed for a midsummer uptick as more shut-in wells are brought back online. But there’s potential trouble just ahead. The months-long imbalance between crude supply and demand boosted U.S. oil inventories in commercial storage to record-high levels over the past few weeks, with even more oil flowing into rented space in the Strategic Petroleum Reserve (SPR) salt caverns. Worse yet for producers, a resurgence of the coronavirus may put some parts of the U.S. back into semi-lockdown, and if that happens, refinery utilization could take a second tumble. That could push more crude into storage or onto supertankers for export, even as OPEC+ is talking about relaxing their production cuts. Today, we examine the trends that could be problematic for U.S. oil producers and refiners in the second half of 2020 and beyond.

Like many a 25-year-old guy or gal eager to head out with friends for tacos and beers, U.S. producers and refiners would like nothing more than for life to get back to normal — the way things were just a few months ago. Producers long for $55/bbl WTI and easy pipeline access to key markets; refiners, for 90% refinery utilization rates and respectable refining margins. However, the reality is that COVID is hanging around and spreading in many parts of the U.S. and there’s a real possibility that the quick return to normal that all of us have been hoping for may not come to pass. It may take time, and crude-focused producers and refiners may be in for another round of angst.

We’ve tracked the ever-evolving impacts of the coronavirus on oil and gas markets for a few months now, beginning with Free Fallin’, a March 1 blog in which we noted that crude prices were in a nosedive. (And were they ever!) A couple of weeks later, WTI was spiraling down toward $20/bbl, and the crude market was in steep contango, with much higher forward prices pulling large volumes of crude into Cushing and other storage to keep the market in balance (see Save It for Later). The driving force behind the price collapse was falling demand for crude from refiners, who were responding to COVID-related demand destruction — that is, the collapse in the use of transportation fuels as stay-at-home orders kicked in — something we discussed in Things That Matter. This got worse, of course. As crude-market folks will surely tell their grandchildren someday, WTI traded at a negative $37.63/bbl on April 20 — the first time anything like that had ever happened — but that anomaly was mostly tied to the mechanics of futures contracts and how they transition from month to month. Further, in Shut Down, Dakota, and Whistler and Fish, we discussed the complicated decision-making around shutting in wells and the curtailments that producers in the Bakken and the all-important Permian quickly implemented in response to super-low prices.