Oil Market Optimism Downplays DUCs

Recent oil market buoyancy fails to properly account for a potential drag on the West Texas Intermediate (WTI) benchmark, according to one of Rigzone’s regular market-watchers. Read on to learn more in this review of oil market developments from the past week.

Rigzone: What were some market expectations that actually occurred during the past week – and which expectations did not?

Tom McNulty, Houston-based Principal and Energy Practice leader with Valuescope, Inc.: I was not surprised that, when WTI hit $40 per barrel, optimism would seep into the market. It’s unfounded. According to the U.S. Energy Information Administration (EIA), there were 7,591 drilled-uncompleted wells, or “DUCs,” across the USA as of June 15. What happens to at least some of these DUCs if WTI trades up into the $40s? They get completed and more crude comes onto the market. Today we have bounced right off $40 back down to the low-$38s.

Andrew Goldstein, President, Atlas Commodities LLC: The uncertainty of the COVID-19 pandemic has kept crude oil in a tight range over the past two weeks, with settlement prices hovering between $36.26 and $40.37. As cases have risen in numerous states, many restrictions have been put back in place – including travel restrictions (mandatory quarantine).

Rigzone: What were some market surprises?

Goldstein: Although I previously called for precious metals to rally, I am somewhat surprised that gold traded out of – and remained above – the range it has been in for the past three months.

McNulty: There were no surprises. The market is working just fine and WTI is sitting in a range where supply and demand match up well, with potential supply in the form of DUCs in the USA and OPEC+ cheating hovering out there, ready to restore both WTI and Brent to equilibrium if they trade up for any reason.

Mark Le Dain, vice president of strategy with the oil and gas data firm Validere: The market continues to talk about U.S. crude storage in a traditional format where the Strategic Petroleum Reserve (SPR) is excluded. Instead of this, entities need to think about available crude as commercial storage plus the component of the SPR that is also commercial as those barrels can return to the market quickly vs. government storage. This is a new dynamic and takes some getting used to and when factored in makes a lot of the recent reports less bullish than perceived.

To contact the author, email mveazey@rigzone.com.