The GERM Report

-Dr. Fauci’s “too soon” warnings may be relevant for the oil sector.

-Brent continues to climb amid pivot to the new normal.

The likelihood that Brent crude oil would follow WTI into negative territory was never a real possibility, one market assessment read. In the US shale patch, it looks like the worst is over, said a pipeline operator. Sentiments like these have put a soft floor under Brent at around $30 per barrel and the futures curve is flattening. Looking ahead, however, and many economists are expecting a long, slow and volatile recovery. Managing the path forward requires predictive analysis into the unknown and few players have the ability to pivot fast enough to avoid major long-term damage.

The price for Brent crude oil was up 3.4% as of 8 a.m. ET to trade at $30.65 in a late reaction to Saudi Arabia and its GCC allies announcing tighter crude oil production restraints. The global benchmark is up some 20% from the start of the month as investors move past the April hangover of low to negative pricing.

A report issued by the Oxford Institute for Energy Studies finds that production restraints, both voluntary and market-driven, are easing some of the concerns about oversupply. If the core group of OPEC members, barring those exempt from production quotas, play ball, OIES analysts expect output to fall from April highs of 27.7 million barrels per day to 20.6 million bpd in May. Curtailments from non-OPEC+ countries, whether voluntary or market-driven, “have been fast and severe.”

“Overall, global oil supplies in May are expected to decline m/m by 11.3 mb/d (of which OPEC crude will account for 7.2 mb/d of the total decline and non-OPEC crude for 3.7 mb/d), the largest shut-in on record,” the report read.

Implied demand in the form of gradual economic reopening, coupled with market-driven production closures, led to overall gains in the price of oil last week. From Australia to France, governments are unveiling step-by-step guidelines for economic reopening. In the US, Michigan’s governor gave the green light for some manufacturers to return to work. Elsewhere, tanker rates are down some 75% from late April and the risk that storage levels, including Cushing, may overflow is fading. OIES analysts added that concerns that Brent could follow WTI into negative territory “were never realistic to start with and are less so now,” adding, “All these factors point to improvement in market fundamentals, though from a very low base.”

In the US, Mackie McCrea, the chief commercial officer for pipeline operator Energy Transfer, was quoted by Bloomberg news as saying that “things are improving” and the worst may be behind us. The shale state of Oklahoma, meanwhile, said “meh” to a rationing system, following the path of their Texas counterparts. And Saudi Aramco, despite posting a 25% drop in profits, pledged to still deliver dividends to shareholders. Saudi Aramco President and CEO Amin Nasser said first quarter results were “unparalleled” given the circumstances.

“While COVID-19 has created unprecedented uncertainty, we have considerable experience in managing through times of adversity,” he said in a statement. “This resilience will enable us to continue to deliver on our commitments to our shareholders.”

But even if Saudi Arabia finds a Goldilocks moment that protects its position without devastating other segments of the industry, OIES analysts said it may be only a matter of time before the apple cart is upended again. With the market focus unwaveringly centered on the coronavirus pandemic, the oil sector could draw parallels from national health officials. Anthony Fauci, the head of the US National Institute of Allergy and Infectious Diseases, is expected to tell Senate leaders today that too much too soon would be a mistake.

“If we skip over the checkpoints in the guidelines to ‘Open American Again,’ then we risk the danger of multiple outbreaks throughout the country,” The New York Times quoted him as saying. “This will not only result in needless suffering and death, but would actually set us back on our quest to return to normal.”

The energy market is still suffering. Boeing CEO Dave Calhoun told NBC that air traffic won’t be back to normal anytime soon. By the end of the year, demand could be close to 50% of pre-pandemic levels. That is bad news for a refinery sector already on its heels. OPEC restraint, meanwhile, is pushing GCC budgets into a deep deficit, according to Fitch Ratings. Those companies, such as Aramco, that are experienced enough to manage a quick pivot in these times of volatility will endure. Those that don’t may experience “needless suffering and death”, as some in the US shale sector have come to find out.