MacroVoices #224 Art Berman: Expect oil prices to move down, then up, then WAY up

Episode Summary

Executive Summary: Episode 224 centers on the crude oil market’s June 2020 rebound, with Eric Townsend and Art Berman arguing that the price pop is likely a reflexive rally within a still-bearish setup. They stress that U.S. production can recover some quickly, but not back to 13+ mb/d via a simple “flip the switch,” and that shale’s long-term decline rates, rig-count lag, storage dynamics, and weak demand recovery imply further volatility.

Main Topics: Crude oil rally and near-term price outlook (Priority: 5/5): Eric and Art view the spring/summer oil rally as largely a bounce from extreme oversold conditions, likely nearing a short-term top around the low $40s before another pullback if demand/storage concerns reassert. U.S. production shut-ins and restart limitations (Priority: 5/5): Art explains that shale wells can come back relatively quickly, but stripper wells often remain uneconomic, and the market cannot simply restore U.S. output to prior highs without a much higher rig count and months-to-years of drilling/fracturing activity. Storage, SPR usage, and unaccounted-for oil (Priority: 5/5): A major theme is that apparent relief in storage is misleading because oil is being diverted into the Strategic Petroleum Reserve and lease tanks, while 'unaccounted-for oil' has turned sharply negative, indicating crude is being withheld from market flow. Demand recovery is incomplete and gasoline-led (Priority: 4/5): Patrick and Art note that the demand rebound is concentrated in gasoline, while diesel/distillate remains weak, implying superficial recovery rather than broad economic normalization. Macro cross-asset signals: dollar, rates, equities (Priority: 4/5): Eric frames the rally in crude alongside a potential turn higher in the dollar and softer Treasury yields as possible warnings that risk assets, including equities, may be vulnerable to another downturn amid a second COVID wave. Energy equities, natural gas, and refiners (Priority: 3/5): Patrick’s chart review highlights the relative weakness of energy equities versus the broader market, the extreme contango and weakness in natural gas, and the comparative strength of refiners benefiting from healthy crack spreads.

Key Arguments: The oil rally is likely a reflexive move off oversold conditions, not proof that the crisis is over. U.S. production already fell materially, but much of the quick rebound comes from shale wells restarting, not from a permanent restoration of capacity. Stripper wells are unlikely to restart economically at current prices, limiting how much output can return quickly. Shale decline rates remain steep; without new drilling, output falls fast, and rebuilding rig count takes years, not weeks. Storage risk has not disappeared: SPR leasing and lease-level tanking obscure the true amount of crude still off the market. Unaccounted-for oil turning negative indicates produced crude is being withheld from commercial flow, helping absorb supply. Demand recovery is narrow; gasoline has improved, but diesel weakness suggests the economy is not back to normal. Energy equities and service names remain depressed relative to the broader market, implying potential upside only if a genuine multi-quarter recovery develops. Natural gas remains structurally weak with a steep contango and poor front-month performance, making ETFs like UNG vulnerable to roll drag. Refiners may outperform upstream energy because crack spreads are healthier and gasoline demand has recovered faster than crude demand.

Data Points: SPX level: around 3,100 - Eric’s market update on U.S. equities near quad witching U.S. dollar index: approaching 98 - Patrick notes the dollar’s reflexive bounce from oversold levels WTI crude price: just under $39 (July contract) - Current crude price discussed at the top of the show U.S. crude inventory build: 1.2 million barrels - EIA reported a build when analysts expected a draw Strategic Petroleum Reserve build: 1.7 million barrels - Art/Eric discuss commercial storage being supplemented by SPR leasing Net effective commercial build: 2.9 million barrels - 1.2 million commercial build plus 1.7 million SPR build adjustment Gasoline inventory change: down 1.7 million barrels - Finished product draws helped offset crude builds Distillate inventory change: down 1.4 million barrels - Finished product draws helped offset crude builds Cushing inventory change: down 2.6 million barrels - Cushing continued to draw despite national crude build U.S. production drop: down 600,000 barrels/day to 10.5 million barrels/day - Largest short-term production decline highlighted in the report Previous U.S. production high: 13.2 million barrels/day - Peak referenced as the pre-crisis production level Short-term rally target: about $41 to $42 - Eric’s expected gap-fill/top zone for WTI Gold base: around $1,700 - Patrick/Eric discuss gold’s sideways consolidation base 10-year yield breakout level: 70 basis points and near 1% - Patrick describes the early-June yield spike and reversal Current tight oil rig count: 165 rigs - Art uses rig count to illustrate future production constraints Rig count needed to maintain 11 mb/d: about 500 rigs - Art’s estimate for sustaining current production Rig count needed to sustain 13 mb/d: about 600 rigs - Art’s estimate for restoring prior peak output Tight oil decline rate: about 30% per year on average - Art’s estimate for shale well declines if no new drilling occurs 2018 well decline rate: almost 50% per year - Art notes more recent wells decline faster Rig rebuild time after 2016 bottom: about 2.5 years - From 193 rigs in May 2016 to over 600 by Nov. 2018 Gasoline consumption rebound: up more than 2.5 million barrels/day from the mid-April low - Demand recovery concentrated in gasoline Distillate consumption rebound: up about 0.7 million barrels/day from the low - Diesel recovery remained much weaker than gasoline Overall consumption versus five-year average: about 16 mb/d vs 20 mb/d - Art says total consumption is still roughly 20% below average Average unaccounted-for oil historically: positive 3.3 million barrels/week - From mid-2017 until the 2020 storage crisis peak Average unaccounted-for oil after tank-top crisis: minus 5.8 million barrels/week - Indicates crude being withheld from market flow Oil withheld from market since mid-April: about 35 million barrels - Derived from negative unaccounted-for oil trend Oil moved into SPR: about 15 million barrels - Art cites recent strategic reserve activity Brent-WTI spread export threshold: about $1.40 needed - Below this, U.S. crude exports are not economical Brent-WTI spread at the time: about $1.00 to $1.50 - Too narrow to support commercial exports U.S. exports decline: down 1 million barrels/day - As Brent premium collapsed, exports fell materially UNG structure: front-month ETF with significant roll exposure - Patrick warns about contango and tracking error in natural gas ETFs

Pivotal Quotes: "“This is the real McCoy.”" — Eric Townsend: Referring to Jeremy Grantham’s view that the equity market bubble is extreme and likely near its end "“There are two possibilities. One is we’re in the final innings of the biggest bubble, perhaps, in financial history.”" — Eric Townsend: Eric frames the choice between a near-term bubble peak and a new central-bank-supported regime "“We are screwed for being able to get back to levels that we have very recently thought were expected.”" — Art Berman: Art’s blunt conclusion on the difficulty of restoring U.S. oil production quickly

Implications: Listeners should expect continued volatility in oil, with near-term rallies vulnerable to demand/storage setbacks. Long-term, U.S. shale cannot rapidly return to prior highs without major reinvestment, so energy markets may face tighter supply later even if prices revisit lower levels first.