Social Distance. The Energy Report 03/30/2020

Oil prices are losing hope that demand will recover anytime soon after President Trump extended federal social distancing guidelines until April 30th. The report drove oil to a 17-year low as America, the world’s largest energy consumer,  will largely be stuck at home. This is adding to the woes of the U.S. energy Industry that is seeing one of its most significant challenges in history. For U.S. shale, it is going to be a game of survival and we know that many won’t survive. Marketwatch reported on Friday that the number of active U.S. rigs drilling for oil dropped by 40 to 624 this week. That followed a decline of 19 oil rigs the week before. The total active U.S. rig count, meanwhile, also declined by 44 to 728,

according to Baker Hughes.

If you think that is a big drop just wait until next week. According to market sources, next week will see the biggest drop in the US rig count in history. Oil drillers have no choice but to stop in their tracks, cap the well and walk away and pray. U.S. pipeline operators are telling oil producers to cut production as the pipelines are getting filled. That is forcing more oil into storage and raising worries of oil  storage running out.

Cushing, Oklahoma, the so-called oil cross-roads of the world and a major storage hub, is seeing cash crude prices for light sweet oil fall below $16.00 per barrel and trading at the lowest level for more than two decades since 1999. According to Reuters, cash crude prices, adjusted for inflation using the core U.S. consumer price index, are at the lowest since before the 1973 oil shock. This is an oil shock for oil producers but in a different way.

The fallout is stressing banks that fund oil operations as well. Reuters news reported that, “U.S. lender Capital One Financial Corp got a waiver from the Commodity Futures Trading Commission (CFTC) after plunging oil prices increased the bank’s derivatives exposure above a key regulatory threshold, according to two sources with knowledge of the matter.

On Friday, the CFTC said it would temporarily exempt a U.S. bank from a requirement to register as a “Major Swap Participant” even though its growing energy swaps exposure would technically require it to do so by the end of the next quarter.

The CFTC did not name the bank on Friday, but the two sources told Reuters it was Virginia-based Capital One, which is best known for its retail lending and credit card business.

The regulator and Capital One declined to comment on the identity of the bank on Wednesday. A spokesman for the CFTC said it issued the waiver to protect the bank and its energy clients from undue disruption, given the unprecedented market conditions over the past month amid the coronavirus outbreak. “We have actively encouraged all market participants to identify regulatory relief or other assistance that may be needed to help support robust, orderly and liquid markets in the face of this pandemic,” the spokesman said. Capital One’s waiver lasts until Sept. 30, but if energy prices remain low or the bank’s exposure remains above the threshold, it will register as a swap participant or make business adjustments, the CFTC said on Friday. The designation entails a number of complex and costly reporting and compliance obligations, which the CFTC spokesman said could hurt the institution’s ability to keep lending.

What is in your wallet?  Reuters says that, “The bank is a relatively small player in the energy lending and financing business, with energy loans accounting for just 1.4% of its total loan book, its filings show.” Yet with consumers losing their jobs I wonder how their credit card company is going.

Gasoline demand is driving gasoline prices lower and lower. The outlook for gasoline demand is dismal. While the historically low gas prices that we see may be exciting if you can’t go anywhere what does it matter.

Still in the doom and gloom, trading opportunities are abundant. Oil coming off record volatility as well as other markets commodities are moving. While in the U.S. we know things are going to get worse before they get better, reports out of China are giving us reason for hope. Reports say that 80% of restaurants that were closed are back open. In Wuhan, the epicenter, things are almost back to normal. China also cut interest rates again and that will also accelerate growth. Keep the faith because we will get through this.
Thanks,
Phil Flynn

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