Oil is getting impatient.
After staging a remarkable rally following an existential crisis in April, crude appears to be at a crossroads of sorts.
Prices plunged and energy shares tanked (sorry) on Wednesday, when supply jitters collided with renewed demand concerns as the market ponders the prospect of regional lockdowns tied to coronavirus flare-ups in the US.
Crude stockpiles touched a record high for a third consecutive week, the latest EIA data showed, while gasoline stocks dropped, a sign of improving demand.
But keeping Americans on the road means ensuring recent surges in virus cases don’t end up triggering new stay-at-home orders. For example, gasoline demand is off just 18% from a year ago in Texas, versus 27% in the northeast, according to OPIS. And yet, Texas is one of the states seeing a disconcerting rise in hospitalizations, which topped 4,000 in the last update.
Bloomberg’s Kriti Gupta suggests the virus is the new trade war for crude. A look back at 2019 shows various instances of oil diving/rising in connection with adverse/positive developments on the trade front.
Clearly, the largest move came after the attacks on Aramco in September, but outside of that, you can identify pivotal moments in Sino-US relations (and trade more generally) simply by looking at a daily chart of crude price movements.
Recent action, on the other hand, is driven by the waxing and waning of the reopening story and news around new COVID flare-ups.
It does seem as though that narrative (the reopening story) has turned decisively for the worse over the past week, which means more days like Wednesday could be in the offing.
The demand story is still very much in doubt, and this is still set to be the worst year on record in that regard. Recent signs of economic green shoots notwithstanding, a robust second half recovery is by no means assured.
With OPEC+ having done their part to help stabilize prices and with US exploration having collapsed by some 70% (figure below), prices are now beholden to expectations for demand, which in turn hinge on the evolution of the reopening narrative.
It’s also worth noting that with WTI recently touching $40, idled production could resume, capping prices as a predictable self-defeating dynamic kicks in.
More than half of the executives polled by the Dallas Fed in a June survey said they’ll likely restart production soon. 20% expect to do so by July, 18% by August and 14% by September, the survey shows.
That said, 80% of respondents don’t see drilling and fracking at pre-pandemic levels until at least 2021, while 16% said they never anticipate a full recovery.
The comments that accompanied the Dallas Fed survey would be amusing if they didn’t represent so many job losses.
“I sold no crude oil in May”, one respondent remarked.
“I can’t even begin to guess where oil and gas prices will be in the future”, said another.
And still another: “Banks are completely unprepared for what is heading their way. They will need to figure out how to own energy assets this fall”.
Or maybe Jerome Powell will just become an oil man.