• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Energy

The Oil Market Is Slowly Rebalancing Itself

For now, recovering from oversold levels makes sense. But is this the start of a full-blown price recovery?
By MALEEHA BENGALI
May 07, 2020 | 11:22 AM EDT
Stocks quotes in this article: USO

After collapsing to nearly $13/bbl, the June WTI contract is slowly making its way back to the $25.5/bbl, nearly doubled in value after all the index and U.S. Oil Fund (USO) ETF rebalancing games. One can argue that the low was artificial in the first place and only a result of a physical market glitch. This was compounded by indices exiting from the June contract in a very short space of time. However, the 7%-8% daily price moves, up and down, are limited to only the front end of the oil curve given the extreme selling going into the May contract expiry and the physical market glut.

As is typical of most experts, after WTI prices went negative in April, there were calls for -$200/ bbl even possible as they preached that global storage tanks would run out of space. Such is the beauty of commodities that inventory balances can distort the market in either direction, but the market does find a way to reach an equilibrium, either by demand destruction or supply cutbacks. In this case, the latter is the reason why the market is slowly catching up post extreme lows.

The entire world was in lockdown mode in March and April, where we saw demand loss of about 30 mbpd. This came at a time when supply was also maxed out as Saudis and the Russians were pumping at will causing a big storage problem in a short period of time. In May, economies are slowly returning from their post lockdown phase, and cars are slowly back on the road and businesses restarting. Demand is still quite low, nowhere close to the "normal" trend levels of January, but it is recovering from dire straits. In May, we now have the full OPEC+ production output cut of 9.7 mbpd taking effect. But something else is helping too.

As WTI prices are below $30-35/bbl, U.S. shale is closing off wells at an incredible pace as the production is no longer feasible, let alone economic. According to the U.S. Energy data, about 1.1 mbpd of U.S. oil output has been shut in. This past week showed U.S. domestic oil production at 11.9 mbpd, down from 13 mbpd earlier this year. Judging by the company announcements, May is expected to see even more closures. As far is the oil market is concerned, these are steps in the right direction - lower supply and higher demand.

Global storage demands are easing a bit as seen by the floating storage. Producers are shutting down their oil production, so storage tanks will not be maxed out. If you assumed the same rate of oil supply as in March, it could have reached the tipping point, but prices had to drop lower and force them to close production to avoid that problem. The last few weeks of oil inventory data have showed crude builds, but lower than the weeks prior. There is still an excess of inventory but the rate of change is lower. The market is cheering this. Given the extreme volatile moves up and down, the market is slowly trying to normalize and find some sense of balance.

As we enter the summer driving season, gasoline demand is going to be very important. Over the last two weeks, we are starting to see inventories draw down, a healthy development. But there is still a lot of inventory to get through before we can call the market "tight". It is still some way above the five-year average. This is going to be key going forward as the U.S. comes back from its lockdown. If Americans start to drive more and gasoline demand picks up, it will support crude demand.

For now, recovering from oversold levels makes sense. But is this the start of a full-blown price recovery? It remains to be seen.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Maleeha Bengali had no position in the securities mentioned.

TAGS: Economic Data | Investing | Markets | Oil | Stocks | Trading | Energy | Middle East | Russia |

More from Energy

Saudi Arabia Has Only One Objective: Higher Oil Prices at Any Cost!

Maleeha Bengali
Mar 5, 2021 10:00 AM EST

For now, they have achieved their objective, showing President Biden firmly who is in charge.

Listen to Mr. Market, Not Mr. Powell

Jim Collins
Mar 4, 2021 1:56 PM EST

Let's look at bonds, rates and, especially, inflation for a true picture of what's going on, and where to put your money.

Jim Cramer: There's No Stopping the Electric Gold Rush

Jim Cramer
Mar 2, 2021 7:10 AM EST

You can't lip service electric vehicles anymore. Exxon's board moves indicate it knows its gasoline days are numbered.

Is Chevron Finally Ready to Make an Upside Breakout?

Bruce Kamich
Mar 1, 2021 1:44 PM EST

Let's check out some charts on the energy giant.

No Longer an 'Aristocrat,' This Dividend Stock Still Looks Pumped

Bob Ciura
Feb 25, 2021 2:30 PM EST

Suncor Energy has a bruised but energizing 3.0% yield.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:38 AM EST GARY BERMAN

    The INDU and DIA

    FIBOCALL: The INDU index and the DIA The INDU ...
  • 10:44 AM EST JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    "The Challenge of Short-Selling"
  • 08:40 AM EST PAUL PRICE

    Recent Pick SpartanNash (SPTN) Raised Its Quarterly Payout by 3.9%

  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2021 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login