Crude prices drop late on EIA data, impatience over OPEC+ progress

Highlights

NYMEX WTI falls nearly 10% Tuesday

EIA sees annual US crude output falling 500,000 b/d from 2019

Details remain vague ahead of emergency OPEC+ meeting

Houston —
Crude futures prices dropped sharply late Tuesday after federal data projected only modest US production cuts in 2020 and impatience grew over an apparent lack of progress in a broader OPEC+ deal to scale back volumes.

Although NYMEX WTI hovered relatively flat most of the day, prices dropped nearly 10% after the US Energy Information Administration’s new Short-Term Energy Outlook estimated that average US crude output this year will only fall 500,000 b/d compared to 2019 because of collapsing global demand from the coronavirus pandemic.

Traders also were looking for stronger signals that negotiations were getting closer to being finalized on a bigger OPEC+ agreement prior to the group’s emergency Thursday meeting.

“The markets started to doubt the potential output cut might be enough to do enough for these oversupply concerns,” said Edward Moya, senior market analyst with OANDA.

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NYMEX May WTI settled down $2.45 at $23.63/b and ICE June Brent was down $1.18 at $31.87/b.

As for products, NYMEX May RBOB was down 5.34 cents to 64.82 cents/gal and May ULSD was down 0.0182 cents to $1.0275/gal.

There remains a lack of consensus on whether the US would participate in any global grand bargain to cut crude volumes and President Donald Trump has refused to commit the country to any deal, arguing that the crash in oil prices will cause US production to fall on its own.

But now the EIA says it expects US production will only fall to an average of 11.8 million b/d in 2020, down from the 2019 average of 12.3 million b/d and estimates of all-time highs near 13 million b/d late last year and into 2020. Oil markets were hoping to see US projections falling below 11 million b/d.

The EIA had previously estimated US production at about 13.2 million b/d in April and May.

MIXED OPINIONS

Within the US energy sector, there are differing opinions on whether the US should join in on any global deal.

Larger Permian Basin players such as Pioneer Natural Resources and Parsley Energy are publicly lobbying on forced production cuts to help stabilize the markets, especially within Texas.

But ExxonMobil indicated Tuesday it isn’t necessarily planning to cut crude volumes at all compared to 2019. ExxonMobil is taking a big ax to its capital spending, cutting $10 billion – or 30% – from its budget. But those spending cuts won’t trigger any big production reductions in the near term.

S&P Global Platts Analytics estimated though that US producers may be forced to shut in much more of their existing production during the next few months as storage space fills up and a lot of the volumes turn unprofitable. US output could be curtailed by as much as 5 million b/d for the next three months, said analysts Rene Santos and Parker Fawcett.

A 55% decline in US shale rigs results in a gradual decline in production, of just 700,000 b/d by December 2020 and around 2 million b/d by December 2021, the analysts said.

“Ceasing all US shale drilling and completion activity (very unfeasible and unlikely) also does not get us there,” they said. “Only significant curtailment from existing production would fill the gap.”

In the Middle East, producers’ crude volumes are surging as the data shows a significant increase in output to work through. OPEC’s core Persian Gulf countries of Saudi Arabia, the UAE and Kuwait contributed to pump a three-month high of 28.97 million b/d in March, with several members busting their production quotas, even though they were not set to expire until the end of the month, an S&P Global Platts survey found.

Compliance among the 10 OPEC countries with quotas collapsed to 6% from 113% in February, according to Platts calculations.