WTI Spikes After Surprise Crude Draw, Production Plunge

Oil prices have roundtripped from last night’s API print, as overnight gains were erased after OPEC presented a bleaker assessment of global oil markets for the second quarter as the COVID-19 crisis continues to drain demand.

Notably, just as OPEC members begin to cut production, the cartel cut estimates for the amount of crude it will need to supply over the three-month period by just under 3 million barrels a day, or about 15%, in a report published this morning.

“On the demand side there’s probably a view that the worst may be behind us, in terms of the peak damage point. If we do see a second wave, that would hurt demand and hurt pricing,” said Commonwealth Bank’s Dhar.

And so once again we look to inventory data for clues with all eyes on Cushing today given some expectation that we’re about to see the beginning of the end of the storage capacity issue.

API

• Crude +7.6mm (+4.3mm exp)

• Cushing -2.216mm (-1.00mm exp)

• Gasoline -1.911mm

• Distillates +4.712mm

DOE

• Crude -745k (+4.3mm exp)

• Cushing -3.002mm (-1.00mm exp)

• Gasoline -3.513mm

• Distillates +3.511mm

The 15-week streak of crude inventory builds is over with a 745k barrel draw this week and fears over Cushing storage maxing out seem assuaged… Nationwide crude stocks fell for the first time since January, while Cushing stocks declined for the first time since February and its largest decline since that month. 

Source: Bloomberg

Bloomberg Intelligence Energy Analyst Fernando Valle notes that “falling tanker rates show that pressure on storage has eased in May as OPEC+ cuts output. An initial recovery in gasoline demand as several U.S. states emerge from lockdown could drive another draw on inventories, but exports are likely to remain subdued. Diesel is in an increasingly delicate situation, as industrial and trade activity slows at the same time as refiners shift volume from jet fuel. Margin recovery is shallow, but positive. Questions remain on how long-lived it will be, as coronavirus cases grow in the U.S. South.”

US crude production has plummeted quickly – though not as quickly as rig counts have collapsed – down 300k b/d…

Source: Bloomberg

WTI hovered around $25.50 ahead of the DOE data and spiked higher on the surprise draw…

Bloomberg Intelligence Senior Energy Analyst Vince Piazza warns that despite a positive shift in sentiment, with well shut-ins and curtailed output announced on 1Q earnings calls, we don’t believe we’re out of the woods yet. Crude-inventory builds that push storage higher remain a palpable concern in the near term. Output cuts are heavily skewed to 2Q, but we fear a ramp-up thereafter as operators anticipate a price recovery. There’s already evidence of well shut-ins coming back on line, and while we appreciate a modest rise in downstream demand, a second wave of coronavirus infections in autumn would temper enthusiasm. We think a sustained recovery will be elusive.