Crude oil supply news comes in from all angles these days, bombarding the market daily with fresh information on producers’ efforts to ramp their volumes back up now that the global economic recovery is cautiously under way. Crude demand is rising, storage hasn’t burst at the seams yet, and prices have come a long, long way in just a few weeks. Permian exploration and production companies, having avoided a fleeting, longshot chance that the state of Texas might regulate West Texas oil production, are responding to higher crude oil prices as free-market participants should. The taps are quickly being turned back on, unleashing pent-up crude and associated gas volumes that, you could say, were under a sort of quarantine of their own for a while. Today, we provide an update on the status of curtailments in the Permian Basin.
Crude oil markets have been in tremendous flux this year and we’ve tried our best to stay on top of the latest developments. Just a few days ago, in Whistle and Fish, we outlined the effort to curtail crude in the Permian. The need for reduced production in the basin was driven by the dramatic collapse in prices earlier this year for West Texas Intermediate (WTI) at Cushing, which dropped into negative territory for the first time ever in April. The Permian wasn’t immune to the price plunge either, as it was already dealing with heavy losses in refinery demand, a topic we covered in Stuck In Midland With Crude. And don’t forget that the decision to curtail oil production is driven by other factors too, many of which we detailed in our Shut Down blog a few weeks back.
Recently, a fairly extended price rally has been driving crude oil values higher, both domestically and in the global market, and once again, Permian prices haven’t been left out of the party. The green line in Figure 1 shows the price for WTI at Midland, the Permian’s primary crude oil trading hub, since the beginning of the year. For reference, the Midland hub has been trading within $1 per barrel of Cushing, its Midcontinent peer, and even trading at a slight premium to Cushing lately. It’s kind of hard to believe now, but WTI at Midland started this year hovering between $60/bbl and $70/bbl before the coronavirus began to slowly grind down demand in Asia. The initial demand erosion became an extended decline as the virus spread, working from home became the norm, and refineries slashed their utilization rates. This period, highlighted by the dashed purple oval, was also accompanied by Saudi Arabia’s early-March decision to initiate what turned out to be a short-lived price war by ramping up its crude oil production. As we detailed in Wipe Out, the confluence of all this helped send Midland WTI prices down to around $10/bbl by early April and laid the groundwork for the plunge to negative prices in late April (dashed red circle) — an event driven in large part by the expiration of the May futures contract, as we outline in Futures Games.
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