The petroleum complex continued to trade in a volatile fashion with early follow through from the strong rally yesterday giving way to renewed selling as the day progressed. Optimism that President Trump will intervene in the price war between Russia and Saudi Arabia, along with talk that the Texas Railroad Commission will limit production in the Permian Basin helped bolster values. The optimism gave way to renewed doubts as to how much the Administration can do following comments from Russia that they don’t want anyone to intervene in their dispute with the Saudis'. Instead the Kremlin indicated that they have good relations with Saudi Arabia and don’t need outside intervention regarding whether they should reduce production to support values. The resulting uncertainty and the appearance that Russia and Saudi Arabia are starting to see the fruits of their efforts at shutting in US shale production helped quickly undercut the market, with June crude falling from a high of 28.49 basis May to a low 22.39 before stabilizing.
Reports of a glut of as much as 8 mb/d in world markets as Saudi Arabia and Russia fight for market share at the expense of the US heightened concerns. Reports of substantial quantities of unsold Nigerian crude remains in the background as it could undercut Brent values in coming weeks.
Particularly troubling are refinery shutdowns due to weak refining margins as demand for transportation fuel dries up. The weakness to the gas crack spreads has been pronounced, with the May trading near an all-time record low of 2.50. How quickly demand rebounds will be a key determinant for cracks but the low margins will certainly force adjustments and provide opportunities in time as the world adjusts to the new realities brought on by COVID-19.
The horrendous timing of this production war when global crude demand is likely to contract substantially due to the COVID-19 spread has left the market wondering where to turn next. The depth of the decline has been sharp and some consolidation at the lower levels might be in order as participants take a breather. Nevertheless the negative news will be with us for some time and will likely get worse before it gets better. We see the 20.00 area basis prompt crude as an area where some support should exist, but rallies are likely to be limited and of short duration.
Prices continued to trade in concert with the macro situation as overnight strength to equities pushed prices higher across the energy complex. Levels weakened when the day session got underway as stocks gave up their gains. Concerns over the spread of the COVID-19 virus remain the overriding theme as it remains difficult if not impossible to gauge the duration and ultimate economic fallout of the pandemic. Weather influences remain moderate as we head in to the shoulder months with no expectations of a demand spike. The support that had emanated from falling production levels has been pushed to the back burner, as any gains from that trend likely don't materialize until the economy returns to a more normal state. Yesterday's storage draw came in at 9 bcf, less than expected and well below the 5 year at 63. Next week's storage number is likely to be dismal again with estimates at a 22 bcf draw in comparison to the 5 year average of 40. Wednesday's low at 1.594 in the active May contract will likely get tested soon as the market continues to digest the fallout from the coronavirus spread.
Charts Courtesy of DTN Prophet X
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