-The cure to lower oil prices in the US may be worse than the problem
-Irrational exuberance may cause the bulls to run for crude oil prices.
The slow reopening of the global economy is breathing new life into crude oil prices as demand starts to eat into supply. The US Energy Information Administration reported total crude oil refinery inputs and finished gasoline supplied to the market, loose proxies for demand, both increased at the end of April. On the supply side, voluntary curtailments made in the US to stem the financial bleeding are on pace to eclipse 10 million barrels per day. But it will be difficult for some of that production to return. And while that bodes well for a balanced market, it does little to support an industry segment shutting down. Meanwhile, with some signs of relief emerging, the temptation to return to disruptive politics may be overwhelming.
The price for Brent crude oil was up 7.4% as of 8 a.m. ET to trade at $29.21 per barrel. With economic data relatively thin this week, perception may drive the market more than technical matters. Irrational exuberance could run high this week as cabin fever breaks.
The worst of the quarantine economy may be over. That’s the word from the big banks on Tuesday. Morgan Stanley stated the supply and demand mismatch “is probably behind us,” but warned that recovery will go through “fits and starts.” Demand recovery was apparent in EIA data that showed crude oil input into refineries edged up 305,000 barrels per day for the week ending April 24. Gasoline production increased and total finished product supplied to the market increased 11%. Add to that a new round of OPEC+ constraint, and the market may have something to celebrate.
The celebrations, however, are likely to be limited to the trading floor. Lynn Helms, the director of North Dakota’s oil production agency, told Reuters the swift decline in output has been “unprecedented.” Operators in the Bakken shale basin need oil priced at about $46 per barrel to break even and we’re a long way from that. In the Permian, where the break-even is closer to $40 per barrel, the race to shut in production is a crowded one with everyone from ConocoPhillips to mid-sized player such as Parsley Energy reigning it in. At issue is closing the right wells at the right time and some of that production might not come back. Nor will the jobs. And in times of severe crisis, the dangers of overcorrection run hot. A bid in Texas to ration out production has ended. Mandated contraction, given well economics, could have added insult to injury, not to mention open the sector up to long and complex legal challenges that would serve nobody’s interest.
Elsewhere, the Trump administration is eager for distractions. A former US special forces soldier said an attempt was made to “liberate” Venezuela from Nicolas Maduro, though Venezuelan military forces allegedly thwarted the coup. Authorities, Maduro said, captured a group of “mercenaries” after they stormed the Venezuelan beaches. Hell bent on convincing his base that the coronavirus was a Chinese invention, President Trump has upped the scapegoating ante by threatening new tariffs on China. Demand destruction from the global pandemic helped push US GDP figures to minus 4% in the first quarter, and only about half of that quarter was during tight quarantines. Trade tensions between the world’s leading economies caused a 1% contraction in global trade last year. Mismanaging the myriad of economic and diplomatic stress points and the Trump administration risks falling victim to the president’s own mantra – “We cannot let the cure be worse than the problem.”