[Editor's note: This story appears in the June 2020 edition of Oil and Gas Investor. Subscribe to the magazine here. It was originally published June 1, 2020.]  

The specter of minus-$100 oil is behind us. Admit it, you felt a touch of morbid curiosity to see if the price would plum­met to new record depths, just to say you were there when it happened and only if it were as short-lived as in April. As the June prompt month contract for WTI approached in May and Cushing storage was anticipated to reach tank tops simultaneously, a harder repeat of the April sell-by date—when WTI plunged ever-so-briefly to minus $37—was feared.

It didn’t happen. In fact, on that day, WTI settled at $32/bbl, a much sunnier day than the predicted storm. In January when oil was com­fortably above $60, $30 would have sound­ed atrocious. Now, after WTI languished in the teens and low $20s for the better part of a month, $30 is a welcome reprieve. At the minimum, it signals price stability. At best, it represents a mile marker on a steady if slow upward trend.

The April historic sell-off will have to stand alone as that remember-where-you-were-then moment, a once-in-a-lifetime anomaly, let’s hope. Mizuho Securities analyst Paul Sankey, who postulated the possibility for a worse and deeper sell-off in May, said the April nega­tive-price event was a result of “panic and blind algorithms.” Fortunately, the financial results were suffered mostly by Chinese retail traders, Sankey noted, to the tune of $1 billion lost. On the flip side, it was a good day on the arb for traders with physical storage.

Preceding the June contract date May 19, U.S. inventory levels did indeed ride “straight up and to the tops of tanks and then rolled off the final limit,” he said, “bang on schedule, especially at Cushing, which drew inventory, hugely significant on the pricing of WTI.”

Cushing drew. No one expected that. Some 10 MMbbl left the Oklahoma tank farm in the two weeks prior to the contract date. Some speculate that oil might have gone to the Strategic Petroleum Reserve or to floating storage in the Gulf. But it left Cushing, and WTI survived.

Indeed, the month of May might be the turn­ing point. Since the global coronavirus pan­demic undercut demand by tens of millions of barrels per day and the ill-timed market share spat between Saudi Arabia and Russia pushed unneeded barrels into a flooded market in March, prices have stabilized—finally.

U.S. producers certainly did their part. It’s been said the American shale industry is the world’s new swing producer because it can react to market conditions quickly, and it did for this test. When the bottom fell out of prices in March, local E&Ps almost instantly slashed capex, rigs and completions.

John Freeman, an analyst at Raymond James, said in a May 15 report that names un­der coverage with a market cap at or above $2 billion slashed budgets almost in half, while smaller companies cut about 27%. Smaller companies, he said, have larger volumes of production hedged or must consider debt cov­enant issues. Some private companies went all in at 100% stoppage.

“Activity reductions are coming fast and fu­rious, with many companies cutting all com­pletion activity in the second quarter and re­ducing rig counts by 50% to 100%,” said U.S. Capital Advisors analyst Becca Followill in a May 20 report.

While chaos reigned in the commodities markets for two months, U.S. producers were quietly and furiously curtailing existing production as well as cutting capex, saving their wares for a better-priced day. Evidence of this showed up in first-quarter conference calls, with estimates that some 1.75 MM-bbl/d to 2 MMbbl/d were pulled out of the market in no time.

But these emergency curtailments might be reversed as quickly as they were implement­ed. Several analysts expect about 1 MMbbl/d to come back onstream in June. “With June and July crude now back over $30/bbl, most are expecting these shut-ins/curtailments to be short-lived and the majority of it back on by August,” Followill said.

For the same reason, prices are now at a lev­el that might incentivize new activity. Above $30, Macquarie strategist Walt Chancellor said he sees a return to “meaningful levels of new completions” by July and August.

Tudor, Pickering, Holt & Co.’s (TPH) Matt Portillo said in a video report, “We’ve seen crude rally to a point where we are able to actually bring production back onstream. It’s coming a little faster than the market expected. The crude market is off life support.”

Fellow TPH analyst Mike Bradley suggest­ed pricing will “go sideways” for a while, holding in the $30s as U.S. production is care­fully added back in, closing the year at $40.

“I’m bullish because I think demand is go­ing to come back stronger than people think; OPEC cuts are going to hold longer than peo­ple think, which will put the market in back­wardation; and we’re going to drain those in­ventories,” he said.

The forward months look stable. Healing is prevalent. It’s time to dust off and move forward.

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