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Rapid Pace Of Price Recovery

Monday, Jun 8 2020
Market Talk

Energy futures were rallying again overnight as OPEC & friends made a new deal this weekend, and a Tropical Storm passed over a critical energy supply hub. Most contracts have given up their gains this morning, however, as concerns mount that rapid pace of the price recovery could mean production may return faster than demand can heal.

WTI broke the $40 mark for the first time in more than six weeks overnight. Of course when WTI hit $40 six weeks ago, there was a negative sign in front of it. The last time WTI was at a positive $40, was Friday, March 6, the day before the Oil Price War started, so it’s fitting the return comes the day after Saudi Arabia and Russia found themselves on the same team again.

Baker Hughes reported another 16 oil rigs were taken offline last week, bringing the total oil rig count to a new 10-year low, and the combined oil and gas count to yet another all-time low. It’s worth noting that unlike most weeks where the Permian basin accounted for the majority of the rig count reduction, this week it was the Eagle Ford that declined the most, with nine rigs taken offline, which was nearly half of the remaining number in that basin. There will be much debate on how soon we may see a recovery in production now that prices are back near the $40 level, although it’s reasonable to think we won’t see meaningful additions in drilling unless prices can get above $40 and stay there for a while. It’s important to remember that with more than 7,000 DUC wells available, U.S. producers can ramp up output even without increasing the rig count.

Cristobal made landfall in Louisiana as a Tropical Storm Sunday, and had shifted far enough east to make things uncomfortable for the refiners and ports along the Mississippi river near New Orleans. Ports have been shut since Saturday, and the damage assessments are underway, but so far it does not appear that there was any notable infrastructure damage to the supply network.

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