(Bloomberg Opinion) -- It is entirely fitting that the one of best performing energy stock on Friday morning was recently bankrupt Whiting Petroleum Corp. As President Donald Trump’s initial tweet-heard-round-the-(oil)-world has snowballed into a seething mass of optimistic rumor, so the more — how to put this? — speculative stocks have floated to the top. Just as crude oil recorded a 25% gain Thursday by moving all of $5 a barrel, Whiting was near the top of the leaderboard on the back of a 4-cent rally.
Saudi Arabia’s call for an emergency Zoom session on Monday, along with reports that Russia may be coming around to the idea of supply cuts, lend credence to the idea that, even if Trump wildly jumped the gun, cuts are coming. Cue mass celebration in the oil market.
To which, one can only say this: Supply. Cuts. Were. Coming. Anyway. As I wrote here, the collapse in demand means we will quickly run out of places to stash surplus oil. Which means refiners stop buying (almost regardless of price) and production gets shut in (some is already). Saudi Arabia and Russia would love to get the U.S. to sign up as a willing partner in making this look like market management rather than managed retreat — and Trump may be of a similar mind.
Getting cuts of anywhere near the 10 million barrels (a day, we think) cut that Trump touted looks very unlikely given the time pressure. On Thursday, I quoted Kevin Book of ClearView Energy Partners as saying, “Tweets travel at the speed of light; barrels move at 10 knots.” To which we can add that the novel coronavirus moves at an exponential pace. Distancing measures mean demand in April could be down by 20 million or 30 million barrels a day. Hence, a cut of 10 million barrels a day would only extend the timeline for storage filling up and, in order to work, would have to happen very quickly.
The country best able to take production down quickly is, as ever, Saudi Arabia. And as painful as it might be to the country’s pride, reversing its stance of maximizing output, adopted less than a month ago, would make sense. Right now, the world has perhaps 700 million barrels of spare storage capacity for crude oil which, assuming 20 million barrels a day of excess supply, would fill in five weeks. As the tanks top out, oil prices would begin collapsing toward single digits well before that deadline.
An immediate cut of, say, 7 million barrels a day, with more than half of that by Saudi Arabia, would push that deadline to more like eight weeks. Think of this as the oil world’s equivalent of flattening the curve, but with the idea being that you try to stave off storage tanks being overwhelmed rather than ICU beds. Damage would still be unavoidable. But Saudi Arabia makes more revenue by exporting 6.5 million barrels a day at $20 apiece than it would 10.5 million at $10. The resulting drop in tanker rates might also support the front end of the Brent crude oil curve, which is where unhedged OPEC producers make their money.
Nice theory. But there’s no guarantee of such immediate cuts being agreed at all — remember that OPEC meeting all of four weeks ago? Best case is that oil producers somehow extend the deadline for storage capacity maxing out, hopefully getting to a point in late May where demand has bottomed out and the inventory glut is merely historic rather than apocalyptic. And even at $20-$30 Brent, many U.S. frackers are still underwater, especially as they’re producing lighter grades more suited for (unwanted) gasoline and suffer discounts to benchmark pricing the further inland they are.
Set against the current reality of cratered oil demand, a lot of things need to go right — and quickly — to justify a hopeful outcome for producers. Four cents actually sounds about right for this rally.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
For more articles like this, please visit us at bloomberg.com/opinion
Subscribe now to stay ahead with the most trusted business news source.
©2020 Bloomberg L.P.