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The Oil Shock We Haven't Felt Yet

Written by Keith Kohl
Posted April 1, 2020

I hope you've all been well through this chaotic turn of events.

Here in Maryland, our stay-at-home order officially took effect last night at 8 p.m. All non-essential businesses were closed on Tuesday as my state confirmed its 1,660th positive case of COVID-19.

Throughout March, we’ve talked about one little corner of the oil markets that would flourish during this period of ultra-low crude prices — storage.

Specifically, tanker stocks.

Keep in mind that my bullishness over these oil tankers was rather strong when WTI prices were trading around $30.

You can imagine how I feel now.

Yesterday, I could’ve picked up a barrel of Texas Tea near the Permian wellheads for less than $5. Front month contracts, meanwhile, dropped under $20 per barrel on Tuesday.

I did mention things would get worse, didn’t I?

It was only two weeks ago, the Department of Energy forecast a decline of less than a million barrels per day for the first quarter of 2020.

We can’t help but wonder just how bad do people expect things will get from here on out? And although analysts across the board have been trying to one-up each others' doom and gloom predictions, the IEA took this game to a whole new level recently.

Here are the words straight from the IEA director’s mouth:

Today, 3 billion people in the world are locked down. As a result of that, we may see demand fall about 20 million barrels per day.

They aren’t the only ones, either.

Goldman Sachs’ latest projections call for demand to decline by 18.7 million barrels per day in April.

Demand destruction of this magnitude would be utterly catastrophic for crude prices.

But there’s another piece to this puzzle on the supply side of the equation.

Both Russia and the Saudis have pledged to boost output, and their little feud is taking place during a time when U.S. domestic production is holding at 13 million barrels per day.

We already know the Saudis are more than willing to cut production — they bore the brunt of the previous production cuts.

The Russians are a bit more stubborn, so what do you think it would take to bring them to the table?

Perhaps a mandatory cap on U.S. drillers to curb production from our biggest tight oil plays?

Impossible, you say?

Why not?

We’ve done it before.

Personally, I’m still not convinced we’ve seen the bottom.

So long as the Saudis and Russia refuse to see eye to eye regarding production cuts, who knows if they’ll reach a deal at their next meeting.

It certainly won’t be anytime soon.

This week, a call for an emergency OPEC+ meeting was shot down, and OPEC’s next ministerial meeting isn’t set until mid-June.

However, there’s one very interesting twist this time around.

Ryan Sitton, the commissioner of the Railroad Commission of Texas (RRC) was invited to have a seat at the table this June.

Mind you, this wasn’t the first time we’ve been invited to an OPEC meeting. Back in 1988, the RRC was allowed to send someone to Vienna.

I know what you’re thinking: We can’t tell our drillers what to do, right?

After all, we’re not talking about state-owned companies.

Oddly enough, curbing output isn’t without precedent.

The RRC actually issued a proration order for Permian fields back in the 1930s.

On August 14, 1939, the commission ordered its first Statewide Proration Order (with an effective date of August 27, 1930) that limited state production to 750,000 barrels per day.

Will we see that kind of action again?

Right now, it’s far too early to say, but it might just be what is needed to get the Russians on board.

Until next time,

Keith Kohl Signature

Keith Kohl

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A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.

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