Crude oil markets have been anything but dull lately. After imploding to unimaginable, negative values last month, prices have been on a tear since and are now sitting in the low $30s/bbl range. That’s not great for producers, but kind of like social distancing flattens the curve, the current price level should keep production volumes in check and stave off the worst of the potential financial distress for most Permian producers, for now. So, what has been driving the price rise? Similar to the pauses in economic and social activity that many cities have taken lately, many Permian producers have recently decided to take a wait-and-see approach on crude prices and throttle back output. Today, we provide an update on the always-dynamic Permian Basin crude oil market and how producer curtailments have materialized in May.
Oil markets have seen more rapidly moving developments over the last few weeks than are usually observed over the course of a year, or more. Just last month we were here describing the unprecedented drop of crude oil prices to negative values in One Way Out. The Permian Basin wasn’t immune to that negative price plunge, as we outlined in It’s Always Somethin’. And, it hasn’t been just the absolute price that has been impacted in the Permian; the price spread between the Permian’s Midland Hub and the Cushing, OK, hub has also been upended a few times recently, a dynamic we detailed in Stuck in Midland With Crude. Today, we take a look at the latest development driving the Permian: crude oil curtailments that hit at the beginning of May and have been roiling the basin’s oil supply and demand balance ever since.
If you haven’t been keeping up with all our crude analysis, just know that the dramatic price sell-off that occurred last month was driven by too much supply and not enough demand. With demand still depressed due to COVID, producers have been forced to pull on the only lever at their disposal and make the distasteful decision to reduce output. For more on the factors driving the decision to curtail, see our blog on the subject from a few weeks back, Shut Down. If you read that entire article, you’d know that the decision to shut in production is going to vary widely by producer, but price is ultimately the biggest economic factor in that choice. Given that prices were so weak at the end of April, it was little surprise that many producers were quick to announce production curtailments for May. For example, EOG Resources announced in its recent quarterly earnings call that it would shut 125 Mb/d of oil production in May, with a large chunk of that assumed to be in the company’s Delaware Basin operations. Pioneer Natural Resources also announced its decision to curtail May production, although by just 8 Mb/d and primarily from vertical wells in the Permian. Other producers were generally somewhere in between those two, with a wide range of decisions made among the various Permian operators, but almost all announcing some form of cut to this month’s volumes. What’s more, many have already said that some level of production cuts would likely remain in place in June, and maybe beyond.
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