The Daily Dose

-The oil market has a serious demand problem.

-Shell is the next big company to consider restraint.

The global oil market is on its knees amid an unprecedented collapse in demand. And it’s not market intervention in the oil patch, but the return of consumer activity that will resolve the issue. According to an IEA report issued Thursday, that might not happen until December. While there is some speculation that Brent could follow West Texas Intermediate and go negative before expiry of the June contract, interest in the December contract, currently at some $32 per barrel, suggests the general sentiment is for a slow recovery. What’s on the other side is the great unknown.

Brent crude oil was trading up some 9% as of 8 a.m. ET at $26.41 per barrel. Most interest has shifted to the July contract. December 2020 saw a surge in volumes, hitting $32.61 per barrel early Thursday.

A 4.8% contraction in first quarter GDP in the United States was not enough to pull down crude oil prices in the previous session. That’s remarkable considering the contraction came even as the US market was open for most of the first quarter. Optimism indicated by the jump in crude oil prices comes as major economies, from the United States, France and New Zealand, are gradually restarting. But consumer spending in the United States plunged 7.5% crash in March, compared with an uptick of 0.2% in the previous reading. April will be worse. Though OPEC++ production constraints go into force officially on Friday, the issue at hand is more of a demand problem than a supply one.

The International Energy Agency reported Thursday that global oil demand is expected “to be a record” 9.3 million bpd lower than last year. With the populations of some 187 nations and territories under quarantine, April demand is expected to fall to its lowest level since 1995, the report stated. Economic activity will return in the second half, but recovery will be gradual. Demand, the IEA stated, “is not expected to reach pre-crisis levels before the end of the year, with December demand projected to be down 2.7 mb/d from December 2019 levels.”

Mandated or not, production is in decline, however. ConocoPhillips on Thursday reported a $1.7 billion loss for the first quarter, compared with a $1.8 billion profit one year ago. The company said it expects to curtail some 460 million barrels of oil per day in June, with more than half of that coming from the Lower 48 US states. Royal Dutch Shell reported that it was cutting operational expenses by as much as $4 billion over the year, compared with 2019 levels. For output, the company stated that it may take measures to trim production “due to demand or regulatory requirements and/or constraints in infrastructure.”

These are desperate times. A quarter million people are dead because of complications stemming from coronavirus and millions of people are out of work in the quarantine economy. The appeal for desperate measures to prop up the oil market may be overwhelming. OPEC and other major producers are introducing artificial mandates to balance the market. In the US, some participants are calling for similar moves. Texas regulators are looking at ration cards for shale oil producers. That, however, is representative of the tyranny of the minority, with a few struggling players pressing for drastic market controls. Writing in the Houston Chronicle, Wayne Christian, a commissioner for the Texas state energy regulator, said the market will take care of itself and without intervention.

“By allowing the free market to work, producers can determine for themselves what level of production is economical,” he wrote.

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