OIL FUTURES: Crude prices tick up with stock markets as Fed offers new support

Houston — Crude oil prices rose with the stock markets on June 15 after the US Federal Reserve offered additional economic support following a morning of mostly negative trading amid coronavirus resurgence fears from Beijing to Texas.

After crude prices fell by about 4% to start the day, they eventually jumped back into positive territory.

Despite new lockdowns amid outbreaks in Beijing, Chinese officials insisted things are under control and another Wuhan is not developing. Also, US President Donald Trump has not shown signs of supporting new lockdown measures as coronavirus cases rise in several states, including Florida, Texas and Arizona.

Meanwhile, the Federal Reserve said it would start buying individual corporate bonds as part of its emerging lending program to help boost the economy. The Fed previously was only purchasing exchange traded funds.

Front-month NYMEX WTI rose 86 cents/b to $37.12/b and ICE August Brent traded up 99 cents/b to $39.72/b.

As for refined products, NYMEX July RBOB jumped 4.14 cents/gal to $1.1657/gal and July ULSD ticked up by 3.56 cents/gal to $1.1370/gal.

"Crude has moved back up to the price level where it's more linked to all the other stuff in the markets," said Dan Pickering, the founder of Pickering Energy Partners, an energy investment firm. "Oil has moved from dramatically oversold to closer to fair, and now we're in a holding pattern waiting to see how the world recovers."

Barring any specific shocks to oil markets, crude priced from $35/b to $40/b will move largely at the whims of the stock markets, he added. "We had really awful prices, and then a really impressive recovery to what's still a dismal price."

Bullish sentiment also emerged from reports that Iraq is finally living up its part of the OPEC+ production cuts as Baghdad signaled it would sharply cut back on oil exports in June. OPEC's second-largest oil producer has been one of the biggest violators of the production quotas.

While crude oil was buoyed by the ongoing OPEC+ efforts to keep more barrels off the market, prices are still sitting below $40/b out of concerns of an extended first wave and eventual second wave of the coronavirus pandemic.

"Oil prices will remain very sensitive to the evolving COVID situation, despite the best efforts of producers around the world to rebalance the market," said Craig Erlam, senior market analyst for OANDA.

The question now is whether the continued presence of the coronavirus thus far during the summer will weigh more on oil prices and global crude demand, said Bjornar Tonhaugen, Rystad Energy's head of oil markets.

"Now, amid a spike in new confirmed cases in the US and Asia, the thought has started sinking in for many traders: 'Hey, COVID-19 is not really gone, what happens now with demand?' " Tonhaugen said.

"Markets move in waves of fear and greed and, after greed has enjoyed a long joy ride, fear has started sprouting again," he added.

Eyes on Texas

With OPEC+ doing its part to balance global supply and demand, arguably the biggest wild card is what happens next with US shale as producers begin to undo well shut-ins that were implemented in April and May.

While US oil production has plunged from record highs by close to 2 million b/d and the US drilling rig count is at its lowest level in more than a decade, Tonhaugen said, "We believe there will be a gradual reactivation of shut-in production, which will be sufficient in the coming months for US production to stabilize and grow from its current levels."

That is true in areas such as the Bakken Shale, but especially in Texas and the Permian Basin.

In fact, the pandemic has triggered a large spike in drilled-but-uncompleted wells, called DUCs, in the Permian, according to a new Rystad analysis.

The US has added more than 750 DUCs in the last three months, including nearly 500 just in the Permian, Rystad said. At the current pace of hydraulic fracturing, those roughly 750 wells would take about two years to all come online, the analysis said, potentially adding more oil volumes just as crude prices are fighting to recover.

US DUC totals exceeded 5,700 wells at the end of May 2020, the highest level since late 2017, Rystad said.

"In the second half of 2020 we might see a modest rebound in fracking without extra drilling," said Artem Abramov, Rystad head of shale research, in the report.

As for Pickering, he said oil priced over $30/b means that some shut-in wells will come back online, and when and if NYMEX WTI rises above $40/b, some DUCs will bring on more barrels.

"It's definitely a risk that at these prices oil is coming back on the market," Pickering said.