U.S. shale, spooked by negative prices last Monday, shows some signs of averting a storage max-out – but it is far too soon to declare victory. The latest EIA data suggests inventory builds are slowing. On the demand side, refinery inputs rose slightly, crude imports and exports ticked up, and end-product demand strengthened as motor gasoline stocks declined. On the supply side, we see strong evidence that well shut-ins are accelerating. It is too soon to say if these trends will return crude markets to balance: we believe strong caution is warranted for two reasons.

First, another wave of COVID-19 infections, either domestically or in key international markets, could sharply reduce crude demand and threaten the nascent return to normalization. Second, even as the rate of national storage level build-outs slow, crude inventory levels are rising at Cushing and PADD 3 (the Gulf Coast). While top-line figures indicate a declining rate of injections to inventory, available storage is still filling up, especially for Permian producers. Making matters worse, Saudi crude tankers are delivering over 50 million barrels to the US over 48 days, further pressuring inventories. The probability of a disastrous storage max-out may be declining as some producers shut-in, but we aren’t out of the woods. A storage max-out and lower WTI prices remain real possibilities.

Finally, as we go to press, we are reading of a proposal by the Texas Railroad Commission (RRC) to forcibly cut each individual producer’s production by 20% from their individual, peak monthly production levels in late 2019. We think this move is likely too little, too late: there is already substantial evidence of market-initiated cuts, at both the national and state level. According to RRC data, Texas total oil production was down 9% in January from its October peak; preliminary estimates indicate February production was 24% below October levels.

This RRC proposal, because it is implemented at the firm level, would also penalize the Permian’s most productive E&P outfits. The Permian’s most efficient producers have cash costs below $10/barrel: they may even be able to increase production in the current environment. The RRC proposal would therefore function as a tax on productivity and disincentivize future efficiency gains. The proposal might also not solve the underlying imbalance between supply and demand. As we’ve been saying for well over a month, the downturn in prices is almost entirely driven by demand factors, not production: the COVID-19 coronavirus is flattening demand. With oil demand down by 30%, the market cannot hope to return to a more productive equilibrium until the virus is suppressed via physical distancing, therapeutics, and/or a vaccine.

Crude storage builds are slowing

U.S. weekly stocks of crude oil, excluding the Strategic Petroleum Reserve, total nearly 528 million barrels, slightly under the record amount of 536 million barrels in storage set in March 2017. Just as important, the pace of weekly storage inventory injections has slowed for the second week, adding to mounting evidence that demand and supply are reaching a new equilibrium. Commercial inventory injections rose “only” by 9 million barrels for the week ending April 24^th, down from 19.2 million barrels two weeks prior. Note, however, that the SPR also rose by 1.2 million barrels, in the first injection to the SPR of consequence since March 2018.