OIL FUTURES: Complex settles higher on optimism that financial crisis has been contained

Crude futures settled higher for the second consecutive day March 21, rebounding from a recent selloff on renewed optimism that the financial crisis has been contained, and that lower prices might tighten supplies.

NYMEX front-month crude settled $1.69 higher at $69.33/b, while ICE front-month Brent settled up $1.53 at $75.32/b.

In refined products, NYMEX front-month RBOB settled 29 points higher at $2.5389/gal, while NYMEX front-month ULSD climbed 31 points to settle at $2.6902/gal.

Crude futures fell roughly $10 since March 7, dragged lower along with equities as the most recent banking crisis spread. However, equities were higher March 21 after US Treasury Secretary Janet Yellen said the government could take action to prevent the collapse of more banks.

"Right now there's optimism that the banking jitters are stabilizing, optimism that we won't have another financial crisis," OANDA analyst Ed Moya said. The market is becoming "more optimistic that demand won't fall off a cliff," he said. "For oil to fall below $60/b, you need a severe global recession and we're not getting that."

The drop in prices has prompted expectations of intervention by OPEC and the Biden administration to provide a backstop against further declines. OPEC will be closely watching price moves ahead of its Joint Ministerial Monitoring Committee meeting April 3.

"OPEC's spare capacity is already relatively low, adding a risk premium to prices. Hence, an OPEC production cut in Q2, as the market is moving from surplus to deficit, could have a sizable positive effect on prices," said Arne Lohman Rasmussen, chief analyst and head of research at Global Risk Management.

The market was looking ahead to potential "injections" into the strategic petroleum reserves by the US Department of Energy. The Biden administration announced in October that it would repurchase oil for the SPR when WTI prices fell to around $67-$72/b.

The DOE so far has not issued any tenders seeking to refill the reserves. In January, the DOE opted not to accept any offers it received as part of its first solicitation to repurchase up to 3 million barrels of sour crude to begin refilling the SPR, indicating that bids it received did not meet the crude specifications and the price it was looking for.

Pace of output growth could slow

While US crude production is expected to grow this year, the recent price drop could reduce the pace of that growth.

"Oil companies are going to be cautious with how much supply they bring back on," Moya said.

US output has lingered mostly between 12 million-12.3 million b/d since October, according to the US Energy Information Administration's weekly estimates.

"We are seeing signs that US production from shale basins is beginning to slow," said Piper Sandler analysts in a March 20 report. "Outside of the potential for operators to shut-in production during shoulder season, we expect that pipeline scrapes will eventually confirm the slowing of supply from either lower activity levels or shuts-ins."

Jeff Currie, Goldman Sachs' head of commodities research, said March 21 he is concerned that US shale producers would pull rigs because of the recent price slump.

While the current NYMEX crude price is "not a clear signal to reduce rigs by producers," if prices stay at current levels or go lower, "rigs are likely to drop over time, mainly from private operators who chase wells with higher breakevens," said S&P Global Commodity Insights analyst Rene Santos.

US rig counts have flattened in recent months, even when NYMEX crude prices were lingering between $70-$80/b. Permian rig counts were at 358 at the beginning of March, remaining in a well-worn range of roughly 350-360 since early November, S&P Global data shows.

But Permian rigs are up from roughly 300 from the same time last year.

Moreover, the number of active hydraulic fracturing "spreads" or units of crews plus well completion equipment, have been rising this year after hitting an apparent year-end slump in late 2022. Well completions are an indication of production that is close to being placed online.

After lingering in the 270s for most of February, the most recent frac spread count was 290 for the week ended March 16.

Roughly 55% of total Permian resources are "in the money" at $70/b, assuming a 30% return of cash flow to investors, according to S&P Global, which expects Permian crude production to rise to roughly 6.3 million b/d by December from 5.9 million b/d in March.

And drilled but uncompleted wells, or DUCs, have risen, according to EIA data. US DUCs hit 4,773 in February, up from 4,717 in December, although that was down from a recent peak of 8,778 in June 2020, when COVID-19 reduced completions.

ULSD lags crude rise

ULSD prices have lagged the rise in crude the past two days, but remain supported by widespread strikes in France, which have kept prices afloat while the remaining complex fell, vulnerable to recent instability in the banking sector.

Strike action escalated at multiple French refineries as workers halted operations at various ports and reduced throughput until at least March 24.

The prompt NYMEX ULSD crack spread against WTI closed at $43.66/b March 21, down $2.71 over the past two days, but still up from $36.38/b March 9, when the French refinery strikes began to escalate. ULSD cracks may have fallen as as the majority of France's 200 oil depots continue to supply fuels.

In the North Sea upstream market, a previously scheduled strike at a BP unit was averted. Organized by around 50 workers employed by service company Sparrows, the group struck a deal that secured them additional paid leave and other improvements.