The crude oil price snapped back to life on a sign that demand destruction has stabilized but production destruction has just begun. While the oil curve is hopeful that U.S. oil demand will return, it is becoming more apparent that many U.S. shale firms might not survive for what at some point, may be an oil boom.

Reuters reports that, “Continental Resources Inc (CLR.N), the company controlled by billionaire Harold Hamm, stopped all drilling and shut in most of its wells in the state’s Bakken shale field, three people familiar with production in the state said on Thursday. Reuters reports that shut-ins have been particularly swift in North Dakota, which produced more than 1.4 million barrels per day (bpd) of oil in 2019, making it the second-largest U.S. producing state after Texas. State officials say production has already dropped by about 300,000 bpd. This month, rival operator in North Dakota Whiting Petroleum (WLL.N) became the first major shale producer to file for bankruptcy. Coming into this year, Continental produced nearly 150,000 bpd in the Bakken, according to company figures.

Yet it is not just shale firms but oil majors as well. The Financial Times reports that oil majors are being, “forced them to make trade-offs unthinkable just two months ago as they slash capital spending and operational costs, suspend share buyback programs, delay project approvals, issue debt and secure new credit lines. Most majors until now have pulled out the stops to preserve their dividend — but Norway’s Equinor on Thursday became the first to cut its payouts.” The FT says that, “The situation is dire. The international oil marker, Brent crude, has plunged nearly 70 per cent since January. Shares in Shell, BP, France’s Total, Italy’s Eni and Exxon Mobil of the US have fallen about 40 per cent, with Chevron down 30 per cent.”

The FT says that Wood Mackenzie, an energy consultancy, estimates that the biggest U.S. and European companies will burn through $175 billion of cash if Brent crude averages $38 a barrel over the next two years, with the drastic $52 billion cost-saving measures announced so far falling a long way short of the $78bn needed to maintain dividends and balance budgets.

Now the risks of subzero oil have some brokerage firms reassessing the risk in the oil market. Some brokerage firms are now not allowing trading in the June, and some cases, July oil futures contract. Reuters reports that several brokerages, including discount giant TD Ameritrade Corp (AMTD.O) are restricting customers from buying new positions in certain crude oil contracts. Reuters reported that TD Ameritrade told customers it would only allow closing trades in June and July U.S. crude futures contracts as well as in all U.S. crude options contracts. Two other brokerages, London-based Marex Spectron and INTL FCStone, said they were limiting new positions being taken up after the high-volatility trading on Monday delivered big losses to holders of that contract.

Reuters report that some retail investors lost substantial amounts of money. Interactive Brokers Group (IBKR.O), another U.S. brokerage, said on Tuesday that it had to take an $88 million loss to cover accounts that had to be liquidated.

Despite the fact that based on current increases, the main delivery point in Cushing, Oklahoma may be filled up, there are some signs that perhaps some storage is being found. Reuters reported that, “Supertanker freight rates eased this week as surging demand for floating storage cooled and crude oil output is set to fall, but rates could jump again as fewer tankers become available and as traders take advantage of weak oil prices, sources said.

The oil rally is still being influenced by the fear of trading zero. Private forecaster Genscape reported that Cushing Storage is at  64,768,087 million barrels. Yet there is a lot that can happen between now and expiration.

Bloomberg News is reporting that a plan being weighed by Treasury Secretary Steven Mnuchin to steer financial aid to beleaguered oil drillers could set up a clash with Democrats who have warned against any bailout for the industry. Mnuchin said he is considering a lending program for the companies that are seeking aid as they cope with a devastating plunge in prices. “One of the components we’re looking at is providing a lending facility for the industry,” Mnuchin told Bloomberg News on Thursday. “We’re looking at a lot of different options and we have not made any conclusions.”

Industry allies have promoted several ideas, such as loans to distressed producers in exchange for government stakes or lifting restrictions on existing aid programs, which could complicate negotiations on future stimulus packages. President Donald Trump pledged to make funds available to oil companies on Tuesday, and top cabinet officials have been huddling over a plan to deliver on the president’s tweeted promise to ensure “these very important companies and jobs will be secured long into the future.”

So the key to oil is to correctly balance the risk to production for the long-haul virus the present glut. While there will be a lot of volatility, the market is in a bottoming process. We believe that the Trump administration will act to avoid an overflow in Cushing, Oklahoma.
Thanks,
Phil Flynn

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