US Oil Production Sees Steep Drop

Economic Report Monitor #11

April 8th, 2020

After Russia and Saudi Arabia stormed the oil markets with announcements that they would flood the market with crude oil. Prices tanked touching the $20 mark before briefly recovering on hopes that a deal could be reached to curb the massive amounts of potential production. The devastation in crude oil futures markets suggested that US production would be reduced as shale production looked to be unprofitable at the new levels. The April 8th weekly supply estimates finally revealed a sharp cut of 600,000 b/d in US production to 12.4 million b/d. The cut finally came after some data collection for the April version of the Short Term Energy Outlook allowed for updated production estimates. The new estimate likely fueled EIA forecasts of WTI spot prices through 2021 which center around $40 after 2020 spot prices close just under $30. Of course, there is a lot of volatility currently implied by options markets, but more so on the upside than the downside. A 95% confidence interval lower bound doesn't see prices falling below $10 an while the upper bound sees prices north of $60 not unlikely. 

Despite the fall in production offering some sort of bullish respite, there were several other data points in last week's data that provided bearish counterpoints. Crude oil stockpiles grew 15.2 million barrels which was expected, but none of those barrels were absorbed by the Strategic Petroleum Reserve (SPR) suggesting the Trump administration has yet to act on its desire to use it to soak up oversupply. Crude input to refineries also dropped significantly, down -1.3 million b/d to 13.5 million b/d, passing below 14 million b/d for the first time in 9 years. Finally, net imports increased 149,000 b/d as exports fell -322,000 b/d. This data point is especially subject to fluctuations, but it's bearish to see it trending in the wrong direction. All of these likely flow from a severe drop in products supply. In total, a sharp drop of -3.4 million b/d was seen last week, -10.7% below a week ago. Finished motor gasoline supplied alone fell 24.0%.

In addition to the first revealing oil supply data, the first glimpse into a COVID-19 real estate market came with slashed MBA Mortgage Applications. After the composite index jumped 15.3% on strong refinancing due to lower rates, this past week saw a -17.9% drop as the economic effects of COVID-19 lockdown sent purchasing lower -12.0% and refinancing down -19.0%. These numbers are likely to continue especially if rates bottom out and recover slightly.

To end the day, the FOMC released minutes of its unscheduled March 15th conference call. The economic reviews were not really surprising as staff members discussed how uncertainty in equity markets across the globe lead to major losses. Debt and credit markets felt similar pain as accessibility was inhibited by an "acute decline in market liquidity." The response by the Fed was swift and large, especially in Treasury, corporate bond, and commercial paper markets which were "severely strained" but "not back to the low point reached in 2008." Since economic data describing the devastation had yet to come out, FOMC members could only make shallow forecasts about the future of the economy. One quote stuck out:

"Several participants emphasized that the temporary nature of the shock to economic activity, the fact that the shock arose in the nonfinancial sector, and the healthy state of the U.S. banking system all implied that the current situation was not directly comparable with the previous decade’s financial crisis and it need not be followed by negative effects on economic activity as long-lasting as those associated with that crisis."

So it seems going forward, the Federal Reserve will operate in the hopes of fueling a quick rebound as the structural shifts are assumed to be "temporary." But as participants cited multiple times, there is still too much uncertainty out there. The minutes also highlighted the committee's recognition of the necessity for monetary and fiscal policy to work together to fight the COVID-19 shock. Most important in that fight is protecting consumer spending which the Fed points out "had been a key driver of growth in economic activity through the first two months of this year." Just under two weeks after these minutes were recorded, President Trump signed the stimulus bill into law hopefully satisfying the first instincts of the FOMC. In the coming months, the Federal Reserve will continue to push towards the quick rebound doing everything in its power to relieve stress on financial conditions.