RBN Energy

With a dwindling market for their crude, many U.S. producers are confronting an unavoidable choice: shutting in existing production. Just go out and flip a switch and turn a valve, right? Wrong. Like everything else in the COVID era, shutting in production is complicated. It is the alternative of last resort for producers, whose primary directive is the economic extraction of oil and gas. But with demand for their products crushed, production from some wells no longer makes economic sense. Unfortunately, the process of shutting in wells is charged with contractual, economic and operational issues that the industry is scrambling to deal with. The situation is fraught with uncertainty, and many producers’ futures depend on how decisively they manage the shut-in process. Today, we discuss the urgent need to reduce oil production and the judgments producers will be making as they take wells offline.

On Monday, front-month WTI at Cushing cratered to a negative $37.63/bbl. On Tuesday, the same futures price rose by nearly $48 to close at about $10/bbl — a positive $10, that is. As for WTI to be delivered in June, it lost well over a third of its value on Tuesday, ending up at less than $12/bbl, but over the past two days it has roared back to over $16/bbl. No doubt the WTI futures market will see more wild times in the days and weeks ahead as traders look to avoid the traps that ensnared the market as the May contract approached expiry. If there’s a lesson to be learned from the past week, it’s that it really helps to understand the ins and outs of the futures market — especially when it is so volatile. Perhaps the most important thing to wrap your head around is that while the futures market mostly involves financial players who will never take physical delivery of oil, the two markets — financial and physical — are fundamentally linked. Prompt-month futures converge on spot prices over time, while physical contracts are settled in part based on NYMEX futures, so producers will feel the sting of Monday’s negative prices when physical April deliveries are invoiced. Today, we begin a two-part blog series examining U.S. spot crude pricing mechanisms.

We have now entered the crude oil twilight zone.  Never before has crude traded below zero, much less at the absurd level of negative $37.63/bbl.  There is no doubt that demand for crude and motor gasoline are far below crude production volumes, leaving the market vastly oversupplied.  But could it really be this bad?  When you are talking about the market for physical barrels, the answer is “no”.  It is bad.  Really bad. But what happened yesterday had more to do with the mechanics of futures contracts and how they transition from month to month, than a complete mega-meltdown in physical barrels.  That is not to say that negative prices for physical barrels are not already a fact of life in some locations. But negative $37.63/bbl?  Something else must be going on. So, to put yesterday’s bizarre market action in perspective, we need to get into a few details on futures contract mechanics, and then look forward to what may be coming over the next few weeks.  In today’s blog, we discuss the factors that are driving such extraordinary crude market developments.

For most of the past three years, Western Canadian producers have had to deal with crude oil pipeline constraints — takeaway-capacity shortfalls serious enough to spur huge price discounts for the region’s benchmark Western Canadian Select (WCS) that are sufficient to support the higher cost of crude-by-rail alternatives. But things are changing, and fast. WCS prices are at or near historic lows — low enough to convince a number of producers to rein in their capital spending and production. Crude-by-rail use is down, and there’s even space available on the usually maxed-out Enbridge Mainline system, the region’s primary pipeline egress. And wouldn’t you know it, just as production is slipping and constraints are easing, real progress is being made on three big pipeline projects that had long been in limbo: the Line 3 Expansion, the Trans Mountain Expansion (TMX) and Keystone XL. Today, we provide an update on Western Canadian crude takeaway capacity and examine whether the region may — irony of ironies — end up with too much.

The whirlwind of events that has transpired in the past couple of months — namely the coronavirus pandemic and the collapse of the OPEC+ coalition — has not only shaken up the energy markets, but quite literally sent it reeling in the opposite direction than where it was headed just a few months ago. The oil price decline has reverberated through the energy complex, and key indicators that drive industry decisions are veering far off from their recent course, and in many cases, also from historical norms. The world is continuing to change at a rapid pace as the industry navigates the uncertainty. Just yesterday, in an emergency meeting, OPEC announced it had reached a 23-nation agreement to cut a combined 9.7 MMb/d of crude oil production starting May 1, 2020. Today, we highlight some of the biggest moves happening in prices and price relationships in recent days and weeks as the realities of crude oil demand constraints, supply glut and low prices set in.

Energy markets are changing faster than at any time in history. It’s hard enough just to keep up with what’s happening today, much less try to anticipate what’s ahead on the other side of COVID. But that’s exactly what we’ll be doing next week at RBN’s Virtual School of Energy. More than one-third of the curriculum is a detailed review of RBN’s hot-off-the-presses forecasts for all the essential elements of U.S. crude oil, natural gas and NGL markets, including our freshly updated outlooks for production, infrastructure utilization, exports/imports and demand. Better yet, we’ll put these forecasts in the context of our fundamental analysis and models, so you can not only understand where it looks like we’re headed today, but gain the skills to adjust your outlook on the fly as circumstances change. Although this blog is an advertorial, stick with us if you would like to know more about how the RBN crystal ball works.