‘I Can’t Even Begin To Guess Where Prices Will Be’: Oil Has A Virus Problem

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.

Earlier this week, governor Greg Abbott called the situation “unacceptable“, and it got materially worse on Wednesday.

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.

Read more: ‘I Am An Oil Man’: How Long Before Jerome Powell Gets Into The Oil And Gas Business?

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10 thoughts on “‘I Can’t Even Begin To Guess Where Prices Will Be’: Oil Has A Virus Problem

  1. In addition to banks owning oil assets, the banks will be taking the keys to real estate assets.
    Solvency problems will not be solved by the Fed- going to get ugly.

  2. A solution to multiple problems: Powell buys every American family a Winnebago (ala Oprah’s giveaway) so we can all be on the road for the year, gulping gasoline, simultaneously being locked down and distancing as we pick up food at drive-through windows. Maybe drive-in theaters will make a comeback, so cancel Netflix.

    1. I’d rather see him buy everyone a boat. After the ice melts due to 100 degree days in Siberia we’ll need more aquatic transportation methods.

      1. Once the permafrost melts in the Arctic and starts to rot and release trillions of tons of methane into the atmosphere, we will ALL be out of work!

  3. The Fed financing a fracker to pump oil no needs or a developer to build a sub-division in which no one can afford to live is most definitely the near term crisis. When wishing and hoping that the Fed can keep enough zombies undead across the ever widening chasm created by a tragically mismanaged public health crisis becomes the apex of our aspirations, we should anticipate a persistent malaise. There will be a great deal of economic pain extending over a very long time from which we will never fully recover. A lost decade and secular stagnation will be a great outcome. And America is not capable –if our response to the pandemic is any indication- of tolerating that kind of pain.

    1. I am more worried about commercial (CMBS) meaning office buildings, retail buildings and high rise apartment buildings in major metropolitan areas than suburban home builders.
      The time lapse from when income generated from rents is no longer is enough to pay the operating expenses, real estate taxes and mortgage payments to the time when the bank actually forecloses on the collateral ( the real estate) is a much longer process than most people might expect.
      First, a few months of interest only, then lawyers get involved and there would be a few months of negotiations. then the bank internally transfers the problem to the “workout” department and more lawyers/negotiations, then a final transfer to the REO ( real estate owned departments).
      Eventually, those real estate assets get “recycled” and sold by the bank to investors – but this entire process takes months/years.

      1. The last thing that happens here is the final recapitalization of the real estate. Demand for some parcels will go down more than others but at new lower prices those recycled parcels will likely end up with higher ROIs and a more stable future. The same process swept through the farm belt in the 1980s and though painful, it put new farmers in the business, helped control the price of food and eventually left new more profitable farms sitting on land back at the prices of 20 years before. Half the condos in Miami and parts of NYC are empty. Prices will come down — a lot — and the new Donald trump and his industry associates will be bankrupt once again.

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