Scraping the Barrel
The dreaded inventory draw confirmation after EIA reported a 1.4 million barrel increase has weighted on oil like a barrel of lead around the bull market’s neck. And the draw in gasoline and a decline in Cushing inventories could only manage to temper the disappointment.
Weakness in oil over the last 48 hours was exacerbated by the surge in coronavirus cases that continues to dominate the US news cycle.
On the demand side, the coronavirus remains the significant downside variable for oil. And while investors have up until this week taken a rather sanguine view to the resurgence in the virus case counts, perhaps leaning on the assumption that local or federal governments will not reimpose wide-sweeping lockdowns, at a minimum investors may need to reconsider a draconian lockdown policy revival, especially if lawmakers find themselves backed into a corner.
But where the real-time reality check sets in is through the lens of global mobility data where two things stand out from the latest update to the Google mobility trackers. First is the flatlining of mobility in Texas, Florida and, to a certain extent, California; the next update will be crucial. Secondly, the Google data only comes out with a delay, so the latest update is useful only to June 19, which was just as the recent pick-up in cases began. One would expect concern over the rise in case counts to put mobility into reverse when Google releases the next update.
Since risk markets, especially oil and stocks, have been moving tangentially to the rise in mobility data, the assumption here is the opposite will hold.
More damaging is the fact that no government-mandated lockdowns have been imposed stateside - so far they’ve only been hinted. Nonetheless the data suggests consumer behavior is changing and the virus fear factor is returning with a vengeance as more and more folks are scared to come out of their houses and spend – or drive, for that matter.
While we could have written down yesterday's sell-off as reflecting some profit-taking after an initial positive reaction to the White House walking back some earlier comments on the US-China trade deal being over, it's getting increasingly difficult to ignore the stark reality that inventory data is not in the draw zone and Covid-19 cased counts are still rising in three of the most populous US states, which is now manifesting itself through the lens of real-time mobility tracking data.
On a more positive note for oil prices (but not so much for the US shale industry as a whole), former BP CEO Bob Dudley said in an interview that he doesn’t expect US shale production to return to growth until the oil price settles above $60/b. The market assumption was that a full-cycle breakeven for onshore US production was closer to $50/b WTI.
Either way, the coming uptick in US production numbers will likely be driven not by a rebound in capex and new wells, but by the re-start of shut-in wells that are once again economically attractive from a breakeven perspective.
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