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US Crude Flat As Oversupply, Falling Demand Outweigh Stimulus Packages

March 24, 2020 at 16:29 by Andrew Moran

US crude oil futures are trading slightly higher on Tuesday as the industry hopes for a lifeline during these turbulent times. Despite multi-trillion-dollar stimulus packages by the federal government and the Federal Reserve, the global supply glut and slumping demand continue to weigh on the energy sector. Oil has relatively stabilized since its recent historic collapse, but analysts are still anticipating prices to fall further.

May West Texas Intermediate (WTI) crude futures edged up $0.12, or 0.51%, to $23.48 per barrel at 15:57 GMT on Tuesday on the New York Mercantile Exchange. Crude prices have relatively rebounded since the dramatic 52% crash over the last month.

Brent, the international benchmark for oil prices, is also climbing higher. June crude futures advanced $0.60, or 2.05%, to $29.89 a barrel on London’s ICE Futures exchange. Brent prices have surprisingly risen 0.35% over the last week, but they remain down 55% on the year.

While global financial markets are booming on drastic stimulus measures employed by central banks and governments, they might only provide temporary relief for the energy industry. It is estimated that the global crude surplus ranges between 14 million and 15 million barrels per day (bpd) as the COVID-19 pandemic decimates demand. Experts forecast that international crude demand will contract 14 million bpd.

Overall, the industry is preparing for prices to crater to as low as $10. And yet, the industrial reaction has varied around the world.

In the US, nearly 1,000 exploration and production companies filed an average of 230 drilling permits a week in 2019. This month, few-dozen firms have filed fewer than 200 drilling permits this month. Many major drillers have slashed their budgets by about a third, while others are curtailing their capital expenditures this year. In total, US energy businesses – large and small – have cut $19 billion from budgets due to prices hovering around 20-year lows.

In addition to the strife between Russia and Saudi Arabia, South Sudan, Gabon, Brunei, and Kazakhstan are raising production levels.

Goldman Sachs wrote in a recent research note that the first round of spending cuts is ongoing, but a second round will begin soon.

We see US oil production falling almost 1.4 mn bpd over five quarters post 2Q20 based on reduced drilling (i.e., before considering shut-ins of existing wells that are likely to be needed) with covered company capex down 35% [year-on-year] in 2020.

Total US capex is likely to fall in excess of 65% with a WTI price persisting in the $20s.

The US central bank announced on Monday that it plans to purchase corporate bonds. Will this include corporate bonds within the energy industry? The Fed has so far said nothing is off the table. Until demand returns to normal and Saudi Arabia curtails operations, nothing may help American oil firms. In this time, you will inevitably see higher storage levels and plenty of job losses.

In other energy markets, May natural gas futures edged up $0.05, or 3.12%, to $1.654 per million British thermal units (btu). May gasoline futures surged $0.0815, or 16.48%, to $0.576 per gallon. May heating oil futures jumped $0.063, or 6.17%, to $1.0875 a gallon.

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