RPT - ANALYSIS - US Crude Oil Likely To Get Crushed Through Summer But Will Return

RPT - ANALYSIS - US Crude Oil Likely to Get Crushed Through Summer But Will Return

NEW YORK (UrduPoint News / Sputnik - 23rd April, 2020) US crude prices will likely turn negative through the summer from massive output and storage scarcity but the shale oil industry itself is expected to survive bankruptcies and job losses, analysts told Sputnik.

West Texas Intermediate (WTI), the benchmark for US crude futures, saw its front-month contract settle below zero on Monday for the first time in its 37-year history as the coronavirus (COVID-19) pandemic caused an unprecedented glut in the supply of oil and lack of space to store it.


The May WTI contract rebounded from the previous session's plunge of more than 100 percent to return to the positive territory in Tuesday's trade before expiring. But June WTI fell 43 percent instead to settle at just above $11 per barrel compared to the $61 that US crude started the year at.

That was a sign to market observers that the market malaise will continue through the summer, the season when demand for oil is typically at its highest. And while there is optimism that things could improve as world economies reopen and billions of people slowly return to work, economists generally agree that life would not be normal again until a vaccine was available for the COVID-19.

"This could happen again to US crude," said Robert Gilmer, an energy economist who's director at the Institute for Regional Forecasting at University of Houston's C. T. Bauer College of Business. "We could see a squeeze again towards June expiry of WTI, where the contract could turn negative. And we might see this repeating through the summer."

John Kilduff, founding partner at New York energy hedge fund Again Capital, concurred with that view. He said production cuts of 9.7 million barrels per day planned by global oil producers like the United States, Saudi Arabia and Russia fell woefully short of demand loss projected at up to 30 million barrels daily.

"In my opinion, the June WTI contract will repeat what May did," Kilduff said. "It will grind lower and lower and lower into expiration and probably turn negative at some point in time."


Kilduff said oil market bulls still harbored hope that the US crude market will get better to some degree by next month.

"I don't see that happening, it could be worse. The demand situation is not getting any better with the pandemic, and the fact that the production cuts haven't really come in yet," he said. "There are 100,000 million barrels of overhang now in the market and it's growing by the day."

Tariq Zahir, managing member at the oil-focused Tyche Capital Advisors in New York said he did not see any bullish scenario for oil over the next three to four weeks.

"Air travel is just at 5 percent of capacity," he added. "People are filling up car tanks once a month compared to four or five. No one's driving. No one's going on summer road trips.


Zahir said he does not see anything that will prevent the June contract from going into the mid to low teens, and maybe turning negative from there.

"Air travel is just at 5 percent of capacity. People are filling up car tanks once a month compared to four or five. No one's driving. No one's going on summer road trips," he noted.

Zahir also said demand will not come roaring back.

"The virus is not subsiding fast even in New York, which remains the epicenter for the outbreak. New York and the US East Coast Tri-state Area, which is most vibrant to the US economy, isn't going to open in less than a month at least. There is going to be a dramatic detriment to demand. You're going to be in a recession," he added.


White House economic adviser Kevin Hassett, meanwhile, told Fox news in an interview that the United States could suffer its biggest economic hit during the second-quarter.

Gilmer predicted shale oil bankruptcies and hundreds of thousands of job losses in main oil producing states like Texas, North Dakota and New Mexico in coming months - above the millions of jobs already shed across the United States since March - if oil continued to trade at around or under $20 per barrel.

"As the marginal producer of the world and with the kind of oil market we have seen in the United States in recent years, the price of oil will have to come back to $60 or $65 if the shale oil industry is to grow again," he said, referring to business of hydraulic fracturing, or "fracking", that had turned America into the world's top crude producer in just over five years.

But as destructive as current market forces were to shale, Gilmer said the industry was too resilient to die. Thus, those believing in theories that the Saudis and Russians were out to destroy the US industry to grab more market share for themselves - even if such beliefs had basis - were likely to be frustrated, he said.

"This is an easy, easy industry to get into," Gilmer said. "And as soon as everyone understands what the idea is, you will see many, many small producers get back into the business."

Gilmer said is a little bit like the factory, an industrial operation.

"Once you know what your cost is, you can operate at that cost. And soon as the crude price reaches $40, you'll reopen your $40 factory; at $50, you'll reopen the $50 factory. I'm afraid for the Saudis and the others who want to crush American fracking, they can crush it. But unfortunately, like termites shale will come right back," he concluded.

President Donald Trump, sensing market rumblings predicting the death of the US shale from the current market malaise, vowed not to let the industry die. In a tweet on Tuesday, the president said he told his cabinet to formulate a plan to make funds available so US oil companies and jobs will be secured long into the future.