Prices Climb as Oil Glut ShrinksBy Peter Appleby | Thu, 05/21/2020 - 16:37
Oil prices are enjoying another day of strong trading as the oil glut created by lockdown measures applied by countries around the world have begun to decrease. The reopening of economies in Europe and Asia have helped ease the buildup of oil that had occurred over the last several months as COVID-19 spread around the world. The shutting of industries, the massive drop off of over 90 percent of commercial flights in some European countries and quarantine measures that inhibited people from travelling by car all helped increase the glut.
Now, as the wheels of economy are creaking to life once again, the surplus is lessening. This led to the Mexican oil basket closing up 4.4 percent at US$27.71 per barrel on Wednesday, while WTI was at Us$34.20 per barrel at 23:59pm on Wednesday and Brent at US$36.37. Both barrels have continued trading well on Thursday, while PEMEX will release that day’s trading prices for the Mexican oil basket later today.
Despite the increase, Mexico’s basket remains at roughly half its January 20 value.
Traders have taken great comfort in seeing US inventories fall for the second consecutive week, reports Bloomberg. There was a “record draw” from the country’s major storage hub at Cushing in Oklahoma according to IEA data, says the news site, while European manufacturing has increased at a rate higher than expected. The easing of the storage problem that paralyzed the industry and took prices below zero is not only down to the reopening of economies but also the impact of production cuts, both voluntary and forced.
Rystad Energy yesterday released forecasts for oil production and predicted that OPEC+ cuts would decrease output of the group to 40.4MMb/d in June of this year. If the agreement had not been made, OPEC+ production would have hit roughly 50MMb/d instead. Meanwhile, non-OPEC+ output is expected to have dropped by 3.8MMb/d from January to June 20 from the 35.1MMb/d predicted prior to COVID-19, to 31.3MMb/d following the pandemic. The US shows the greatest production drop at -2.2MMb/d, while Canada, Brazil and Norway follow with -1.4MMb/d, -0.2MMb/d and -0.1MMb/d respectively.
The US’ shale industry has been changed by the arrival of the pandemic. According to Rystad, of the 30,000 fracking well coordinates that the company analyzes, it has seen activity on only 92 well sites during May. Many thousands of workers have lost their jobs as wells have been shut due to the commercially unviable cost of activity in Texas, the world’s cheapest gas.
If prices continue to rise, activity on US shale wells will pick up in the future. However, demand is still on jittery ground and world leaders have warned they will close down their economies again should any further COVID-19 outbreaks occur.