June WTI futures were higher by almost 19% last week, from a closing price of just below $25 on Friday, May 8th to a closing price of just below $30 by Friday, May 15th. In the scheme of things though, this puts the market only slightly higher than the 20 year lows not seen since 2001 & 2002.
The bulk of the rally was in the front few contracts which led to a collapse in calendar spreads.
The reality is that the panic-induced selloff occurred as demand came to a screeching halt before refiners, producers and storage operators could make any meaningful adjustments. This was further exacerbated when refiners began responding by cutting refinery runs, which left market participants with limited outlets for barrels. All of this was against a backdrop OPEC+ cuts that expired the end of March.
A lot has changed from April to May:
The market has proven that it can, and will store oil at lower levels of contango
The OPEC+ supply cuts of over 11 million barrels per day are assumed to have been implemented as of May 1 (according to the new OPEC+ agreement).
The estimate from the International Energy Agency on Thursday suggests that the U.S. could be the single largest contributor to a historic global drop in crude supply by year end (2.8 mb/d lower than end-2019 production levels).
In fact, the EIA Short-Term Energy Outlook (STEO) actually has US production further declining in 2021 by another 6.7% with 2021 consumption increasing by almost 8%.
There are no shortages of estimates out there, and in all likelihood none of them will come very close to hitting the mark. Markets are fluid and constantly adjusting with changes to inventory levels used as weekly feedback. To get a feel for how sensitive inventory levels are to slight changes in estimates, we plotted historical EIA data against future estimates below (dashed yellow=EIA 2020-2021 production estimates).
By simply adjusting for an earlier return of refinery operations (via increasing the refinery utilization rate +3%, dashed black line), returning crude oil net imports to 2019 levels and holding EIA production estimates constant, we obviously see see a much faster drop in US commercial crude oil inventory levels (dashed red line vs solid red line). This isn't meant to be a projection, rather an example that highlights how sensitive the market is to changes in demand at lower production levels.
In addition, the CME open interest in the June-2020 contract is now much lower than that of the May-2020 contract 2 days prior to expiration.
So, yes, all of the above combined to 'stabilize' prices at higher levels. However, absent the severity of the selloff last month, sub $30 oil prices would not be considered 'high'. In fact, as we saw above, prices are almost at their lowest levels in 20 years. This is fairly absurd given the growth in global demand over the last 20 years. The big difference is that the upside call on production has become more elastic. Meaning that the world continues to expand it's 'ability-reserve' to bring new production online in a more timely fashion. In addition, it is assumed that worst of the demand reductions are behind us. In that way, the market has moved it's focus FROM severe damage-control TO future storage incentives.
This is a catch-22. When supply cuts are used as a tool to balance supply and demand, the market fears providing too much incentive to producers to store oil because, in their own way, supply cuts are a form of 'storage'. Given the right price signal, it is assumed this production will return. This is an untested theory in an environment of such severe supply cuts. We think this will translate to a market that will once again need to be front-led. As in, the front of the market will need to prove strength before the back of the market will respond. This is a condition that the current market has become accustomed to (green line vs other lines below).
Weakness in the front of the market and increasing contango became a bit of a staple the last month. It's the intuitive response to what everyone is currently experiencing in this pandemic-driven world. Storage is filling up. Demand has fallen off a cliff. Oil prices went negative. This rebound is temporary. These are the battle cries. Yet one always has to be ready for a time when the market does not reflect your current emotional experience.
We are suggesting that as America reopens for business, the market will only be willing to tepidly reflect increased demand in the front of the market which will keep calendar spreads tight. This will feel like it's not aligned with storage levels.
Inventory Recap
US inventory levels by PADD vs total storage capacity by PADD:
Weekly Stats
The EIA reported a slight total inventory BUILD of 1.10 million barrels for the week ending May 8, 2020. Gasoline inventories drew everywhere but PADD 1 (East Coast).
Year-to-date, this bring us to a Total Inventory BUILD of a record 122.4 million barrels! This surpasses all previous year to date builds in total, however the crude oil build alone (ex SPR) is still less than the 2015 ytd build by 3 million barrels.
Inventory levels are shown below, compared to prior year levels for the same week ending as well as against total storage capacity. The record-breaker continues to be gasoline inventory levels, even with draws over the last 2 weeks.
Lee Taylor - Technical Levels
BRENT
Resistance: 33.20/ 34.20 / 36.00
Support: 30.70 / 28.19 / 25.09
July Brent was able to break through resistance of 30.70 a few times last week, but it was not until it settled above that when market really took off. July Brent will now be in a range between 30.70 to 33.20 until it can settle above or below one of those levels. WTI and Brent still have a bit to go before it can flirt with the gaps looming above the markets. On the other hand, the front spreads have done so or are flirting with these gaps. Look for July/Aug Brent to make a play at flat before too long.
WTI
Resistance: 29.93/ 31.44 / 32.59
Support: 29.36 / 28.27 / 27.54
While the energy markets received some promising news from across the pond, the 29.01 level was important to break through and will be a key level to hold to maintain any rally in the energy markets. There are other short-term levels that people will be looking at but 29.01 will be crucial as the markets test the biggest critical technical barriers which are the gaps left back in early March. July/Aug WTI is making another attempt at the gap above between -45 to -31.
RBOB
Resistance: .9820/ 1.0271 / 1.1124
Support: .9309 / .8975 / .8515
June RBOB rallied like the rest of the energy complex, and led so by example. Unlike the RBOB spreads that were completely overdone to the upside, the flat price has constructed a strong rally that can be built upon. June/July rallied almost 5 cents in two weeks only to retreat 50%, only to have another resurgence on Friday. I have been watching the RSI numbers quite a bit lately – they have been right on target in doing what they are set out to do – highlight markets, flat price and/or spreads that are over-bought or over-sold
HEATING OIL
Resistance: .9426/ .9677 / .9878
Support: .9401 / .8918 / .8641
June Heating Oil rallied on Friday but has an enormous task of rebuilding any momentum, strength, or confidence. Although the rest of the market has its sights set on upside objectives, June Heating oil will need to break above .9426 to garner any cheerleaders! Focus on the downside as it can have intraday rallies; however, the technical levels are so distant that one cannot get overly excited about it. June/July will need to stay above -347 and then break above -308 to sustain any type of rally.