02 June 2020 by jbchevrel
Crude prices have come a long way since the deep dive into negative territory a month ago. Stricto sensu, the WTI front contract is c$75/bbl higher than what it was a month ago, when it settled at -$37.63 on April 20. Although the negative price seen near the expiration of the May contract was a brief technical anomaly, the June contract also dipped down to near $10/bbl. Instead of diving back into negative territory, the June contract steadily gained strength throughout the month of May, expiring above $30. This has largely benefitted US (formerly for some) IG energy linked CDS. Most of them have reached new post-COVID tights. HES and HAL 5y CDS is now 120. APA 5y CDS is now 320. OVV 5y CDS is now 350. As an example, HES 5y CDS spread has retraced c94% of the initial widening that had occurred starting from 2/21 at 80bp to then reach 630bp. we are now back at 115bp. this does not seem to leave much Risk Premium room for the eventuality of a 2nd wave of COVID cases. The crude rally was helped by both supply cut and demand growth. The U.S. oil rig count is falling at the fastest rate on record. From March 13, the rig count was cut -50% just over 6 weeks and is now down -65% since that date. Back in 2014, it took nearly 6 months for the rig count to be halved. The supply move here was much more brutal. U.S. production has fallen sharply accordingly. At the end of March, the U.S. was still producing 13 mBPD. By mid-May, that had dropped -10% to 11.5mBPD. By comparison, following the 2014 oil price crash, oil production only fell by -1.1mBPD, and that took 1 year to happen. The only other time the U.S. has experienced a rapid 1.5mBPD production decline was in the aftermath of Hurricane Katrina in 2005, but production quickly returned to normal afterward. Demand has shown signs of recovery, as some states have let stay-at-home orders expired. According to the EIA, in early March U.S. consumption of petroleum products had reached 21.9mBPD. That was one of the highest weekly demand numbers on record. 1 month later, demand had fallen to 13.8mBPD. That was only about 10 days before the May WTI took that dive into negative territory.