Oil has rallied over the last week as additional production curtailments have been announced both by U.S. producers and members of OPEC. Additionally, commercial crude inventories reported a draw last week, for the first time since January 17, 2020.
Gas prices slid this week as concerns about associated gas production and their correlation to crude prices surfaced. With crude prices rising, producers may become reluctant to cut production, or even potentially bring shut-in wells back online more quickly. Weak LNG fundamentals also weighed on the market as global benchmarks, JKM and TTF, remained depressed.
Production Declines. U.S. oil production is down by more than many realize, if we deconstruct government data. A combination of shut-ins and PDP declines have pushed production down by near 3 MMBbl/d. The market has responded, lifting prices to just shy of $30/Bbl. We moved this Factor downward to show that it is more priced in.
OPEC+Supply. Saudi Arabia announced this week that they would decrease production further. These additional curtailments lessen the bearish pressure OPEC+’s production has placed on the market. However, we still classify it as a surprise, because that supply won’t stay curtailed forever. We moved this Factor upward.
Storage Capacity. The U.S. supply-demand balance moved to undersupplied for the week ending May 8. This is a signal that, if production doesn’t creep back up, storage capacity limits might not be reached. We moved this Factor upward to show it as a less probable Factor, but still a potential bearish surprise.
COVID-19/Demand. We left this Factor in its place, but we recognize that some demand is likely returning. The U.S. stats don’t look much changed, but there are some signs that global demand may be turning. Slowly.
Prompt-month natural gas gave up about 20c this week. We attribute the loss mostly to short-term Factors.
LNG Arbitrage. Cancellations of U.S. LNG cargoes for June could erase 2.5 Bcf/d of demand. This, combined with signals that the gas market is still a bit loose (more supply than needed), has helped prices slip. We see this as a potential issue in July, too. We moved the Factor downward to denote it as more priced-in.
Associated Gas Production. We did not move this Factor, although there are arguments for moving it higher (more of a surprise) or lower (more priced in). By our measurements, associated gas production could have already fallen by 5 Bcf/d, across multiple basins. However, the loss in supply isn’t manifesting as small inventory builds. Therefore, we think it isn’t incorporated into price, but rather being dominated by demand issues.
Unemployment. Unemployment filings are continuing at a slightly higher pace than expected, with new claims totaling 2.981 million for the week ending May 9, as compared to consensus expectations for the latest count to be 2.7 million. The total number of new jobless claims since the coronavirus crisis shutdown is now nearly 36.5 million, by far the biggest loss in U.S. history.
Inflation. With larger than expected drops in consumer and wholesale prices, as measured by this week’s Consumer Price and Produce Price indices, there is less pressure on the potential expansion for inflation.
Stock Market. The equity markets’ recovery took a small step back this week on the back of numerous worse than expected economic data, potential trade issues with China, and the sharp warnings of experts over opening the economy too quickly.