Oil prices see record advance in May

Crude prices ended the month of May with an 88 percent surge, its biggest monthly advance on record, according to Bloomberg.

Just weeks after falling to a negative $38 a barrel on April 20, West Texas Intermediate on the New York Mercantile Exchange closed at $35.49 a barrel, up about 6 percent, or $1.78 a barrel, and above the $34.35 recorded Tuesday, when markets resumed trading after the Memorial Day holiday. The posted price rose $1.75 to $32 a barrel Friday.

Natural gas prices on the NYMEX switched to the July contract at mid-week, giving prices a slight boost. Prices gained 2 cents Friday to close at $1.849 per Mcf.

Oil prices are now at their highest level since March, though well below levels seen as the year began. Supporting prices is the massive supply cuts being made by producers across the world

Sarah Emerson, managing principal with ESAI Energy, said in a webinar presented by her company that by the time 2020 has come to an end, U.S. shale production will have declined 2.2 million barrels a day.

“We think there’s a little further to go, then we feel it will stabilize,” she said. “It will be difficult to recover quickly, especially in the current price environment.”

She said that by December, 500,000 barrels will have come back online as prices signal the need for more production.

“Frankly, I am not feeling any better about prices, as no operator will begin drilling and no banks will be extending credit again until prices get back in the $50 range and stay there for an extended period of time,” Kirk Edwards, president of Latigo Petroleum, told the Reporter-Telegram by email.

“This is the fifth chapter of the same book I have seen since the 1980s where this country and our administrations allow Saudi Arabia and our domestic refiners to completely decimate our domestic oil industry by collapsing prices and then start playing nice again. Just so they come back up to some minimal level for a bit, like today's price of $35.49,” he continued. “It is a shame that we have lost some 30-40,000 workers just from our drilling industry alone over the last three months and as of today have the lowest domestic drilling rig count ever with only 148 rigs running today versus 451 a year ago in the Permian. Again, (it’s) because we have no coherent national energy policy to protect us from this happening time after time after time.”

Ed Longanecker, president of the Texas Independent Producers and Royalty Owners Association, told the Reporter-Telegram by email that “Opinions differ among producers, with varying degrees of both optimism and legitimate concern. A U-shaped recovery is likely, with industry consolidation and an increasing number of bankruptcies emerging as an unfortunate byproduct of extreme market conditions.”

Todd Staples, president of the Texas Oil & Gas Association, told the Reporter-Telegram by email, “While much recovery is still needed, the huge shift from negative pricing in May to the low $30’s for June WTI is a positive indicator of the underlying, solid fundamentals of the oil and natural gas industry. It is also a clear sign that the quick, decisive action operators have taken in response to market conditions is the surest and most efficient way to overcome this downturn. Rough patches are still highly possible on this road to recovery because demand must rebound and the supply glut must be worked through, but a big cloud has been lifted with this pricing turnaround.”

Chris Midgley, global head of analytics at S&P Global Platts, said in a note to clients that prices have been supported by increased commitment to production cuts of about 14.4 million barrels a day by members of the Organization of Petroleum Exporting Countries, partner countries and large non-OPEC producers for May and June. A more pronounced recovery in demand of about 4 million barrels per day per month has also lent support to oil markets.

The recent rebalancing of the markets through the massive production cuts has helped avoid storage capacity reaching its limits, as stocks have built by almost 1 billion barrels over the first four months of the year, he said.

“However, the market is unlikely to see any significant stock draws before the fourth quarter and refinery margins remain very weak/negative, limiting further upside in the short term,” Midgley wrote.

He said oil supply is likely to spring back as producers begin to relax their May and June cutbacks. He said the upcoming June 10 OPEC meeting will be critical in maintaining production cuts into the second half of the year.

“However, around the world, over $100 billion of capex has been cut.  In the US, rig count is down by 65% and frack crews are down by 85%, highlighting much lower activity,” he wrote. “Production will steadily fall, as in the US declines outpace new production from September and throughout 2021. OPEC + has plenty of spare capacity to put more oil onto market if prices recover further as they won’t want to stimulate an early US shale rebound,” he wrote.

He predicted demand will increase 4 million barrels a day month-over-month through August but slow in September by 1 million barrels a day with secondary waves of infection posing a significant risk to demand and balancing in the fourth quarter. The 2021 demand is forecast to still be 900,000 barrels a day below 2019 levels.