Sticker Shock May Await New Oil Buyers

Who in the U.S. is still buying lots of crude oil produced in Saudi Arabia, and does sticker shock await new purchasers of crude oil? Those are but two of the observations by this week’s Rigzone panelists contemplating recent hits and misses in the oil market. To learn more, read on.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Tom Seng, Assistant Professor of Energy Business at University of Tulsa’s Collins College of Business: The (U.S. Department of Energy’s Energy Information Administration) Weekly Petroleum Status Report showed a huge increase in commercial crude oil inventory of 19 million barrels vs. a forecast calling for 11 million. Refinery utilization also fell to 69 percent, a level not seen in quite some time – possibly as a combination of lower gasoline demand and seasonal turnaround. And, U.S. oil production for the week ending April 10 was only down to 12.7 million barrels per day (bpd), indicating that U.S. producers have not yet cut back on current supply despite historically low prices.

Andrew Goldstein, President, Atlas Commodities LLC: WTI crude oil is down 20 percent week-to-date, which would have been expected had OPEC not agreed to a 9.7 million-bpd production cut. OPEC was hoping that the cut, which was agreed upon earlier this week, would have given spot prices a boost. However, the continued lack of demand due to COVID-19 has played a much larger role in spot pricing. As we look out one year on the curve, prices are closer to the $35 level.

Steve Blair, Senior Account Executive, RCG Division of Marex Spectron: There were several non-surprises in the market over the last week or two – beginning with the production cut agreement between global producers, which cut a record amount of crude out of the market but still not enough to offset the huge decline in global demand. OPEC’s own monthly report indicates that a 20 million-bpd decline in global demand will occur in April, with the overall demand decline expected to be 6.8 million bpd over the entire course of 2020. Despite these cuts the market is nonetheless continuing its focus on the ever-dwindling storage picture as the over-production and lowering demand continue to move storage facilities to the max. OPEC’s report also indicates that tanker rates for crude transport rose 69 percent in March, as well as seeing an increase in options purchased for floating storage.

Rigzone: What were some market surprises?

Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: The financial price for crude held up well above the physical, where many producers were getting single digits. A lot of this is due to an inflow of funds into the financial. We expect this will stop when these new buyers realize the costly roll of the contracts associated with a lot of the public instruments they are using. With the contango in the market, when an exchange-traded fund (ETF) like United States Oil Fund (USO) rolls the contracts, you are effectively buying high and selling low. I’m not certain a lot of the retail investors that have added instruments like that understand how the curve structure impairs their returns, and I worry they will be surprised.

Blair: The weekly U.S. Department of Energy (DOE) report was mostly ignored as what was seen was already in the price structure of the market. However, a few surprises were seen in the report. First, domestic crude production declined 700,000 bpd in last week’s report, yet it only declined another 100,000 bpd in the report today. Crude imports declined to around the 5.7 million-bpd level but crude exports remain high at 3.436 million bpd in an arena that has not much thirst for crude. Distillate stocks build by 6.3 million and distillate demand declined by over 1 million bpd. This was somewhat understandable with the milder weather we saw in the U.S. last week lowering the heating demand, but we would have expected demand to remain more stable with distillate demand in the U.S. – as well as elsewhere – keeping diesel fuel demand at a higher level than the current 2.757 million bpd shown in the DOE report.

Seng: U.S. imports of oil from Saudi Arabia jumped to about 830,000 bpd in March vs. 370,000 bpd in February and are estimated to have been 12 million barrels for the first week of April alone. Given the Saudis’ price war with Russia, the question looms as to who in the U.S. is buying this crude which only hurts the oil industry here.

Goldstein: Although it is known that the lack of demand is increasing due to COVID-19, the 19.5-million-barrel build in crude and nearly 5 million-build in gasoline inventories were surprising numbers. OPEC sees demand dropping to its lowest level in 30 years.

To contact the author, email mveazey@rigzone.com.