Prices Rally as Lockdowns End
May 22nd, 2020
US crude oil production is expected to fall by about 1.75 million bpd from recent levels by early June. IHS Markit said operating cash losses, a lack of demand and storage capacity and no interest in giving away oil all played a role in the expected decline in oil production. According to IHS Markit, much of the reduced production will return in the summer and fall if the price is right. The resumption of production may accelerate if WTI remains above $30 per barrel. However, about one third of the volumes about 550,000 bpd will remain out of the market for the longer term or at least until WTI prices remain above $50 per barrel. Analysts expect about 1.4 million bpd of daily production from US shale oil regions to be shut in, along with about 550,000 barrels of production from stripper wells that produce five bpd or less.
Shale Coming Back?
The potential for more shale production to get back online seems to growing as prices rise. The average price of breakeven production for the US shale companies is now higher than just a few months ago. Before the pandemic there was talk of operating costs going down and lower breakeven levels. Those numbers are a moving target, but obviously higher crude prices will help some shale production come back. It may happen sooner than we originally anticipated thought.
The energy market is seeing a little profit taking as trade tensions between the US and China have increased. The added tension comes from discussion of where the virus started and how quickly the information was shared.
Prices have rallied on the optimism of the lockdowns ending. Energy demand is moving up because more people are getting out and about. The EIA inventory report yesterday was a bit concerning on that note as demand was off for gasoline. Demand for gasoline was down in the weekly EIA report by 538,000 bpd to a total of 7.034 million bpd. Last year at this time demand was 9.845 million bpd down 2.811 million bpd compared to this year and on the three year average demand is 10.061 million bpd down 3.027 million bpd compared to this year. These figures will be watched closely in the coming weeks. This weekend is traditionally the kickoff of the summer driving season.