June WTI Futures Gain Friday

WASHINGTON (DTN) -- Nearest delivery RBOB and ULSD futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled down Friday while June West Texas Intermediate futures surged 5% in response to another weekly decline in U.S. drilling activity as major oil companies rapidly cut investments in short-cycle oil drilling amid a collapse in global demand.

Baker Hughes reported Friday the number of active rigs drilling in the United States fell 53 to a new four-year low of 483 in the week ended May 1, down 358 since mid-March. The sharp decline in domestic drilling activity shows the industry in distress, with companies large and small cutting their exposure to shale assets. ExxonMobil and Chevron, major American oil companies, Friday announced deep investment cuts in Permian Basin activity, with the west Texas, east New Mexico basin having fueled the sharp growth in U.S. oil production.

The U.S. Energy Information Administration now projects U.S. crude oil production will average 11.8 million barrels per day (bpd) in 2020, down 500,000 bpd from fourth quarter 2019.

Globally, Exxon and Chevron plan to shut in 400,000 bpd in the second quarter, partly as a result of OPEC+ cuts. Shell said Thursday its crude output could decline as much as 40% in the next three months as governments embark on a supply cutting agreement.

Friday, OPEC and 10 non-OPEC producers began a 23% reduction in their collective crude output, accounting for 9.7 million bpd or 10% of global supplies. Several smaller producers announced this week early curtailments to meet OPEC+ quotas but concerns remain around compliance and technical issues in implementing the supersized curbs. Iraq, the second largest producer within the cartel, is reportedly still in talks with oil majors operating its southern fields on meeting the curtailments.

Vladimir Milov, Russia's former energy minister, is skeptical Russia would achieve the 2.5 million bpd in cuts to meet its quota obligation amidst "too many technical challenges."

"Production cuts of such magnitude have never been done in Russia, so we are venturing into the unknown," said Milov.

WTI futures briefly came under pressure after a U.S. manufacturing index plunged to a decade low 41.5% in April as the economy suffers deep contraction amid the coronavirus lockdown. U.S. gross domestic product contracted 4.8% in the first quarter, the steepest decline since Great Recession a decade ago. In comparison, the Eurozone's economy took an even harder hit from the pandemic, with France's GDP falling to a negative 5.8% in the first quarter, the worse contraction since World War II. Unemployment in both the United States and European Union skyrocketed in the past seven weeks, with more pain to come in the second quarter.

On the session, NYMEX June WTI futures advanced $0.94 to $19.78 barrel (bbl) while up $2.81 on the week. The international crude benchmark Brent contract for July delivery settled little changed at $26.44 following Thursday's expiration of the June Brent contract. NYMEX June ULSD futures declined 3.70 cents to $0.7961 gallon and NYMEX June RBOB futures declined 1.74 cents to $0.7663, reversing lower from a $0.8029 six-week high on the spot continuous chart.

Liubov Georges can be reached at liubov.georges@dtn.com