Oil prices bounced back last week, jumping to more than $30 a barrel – still historically on the low side, but far better than the negative territory we saw futures dip into last month. While some see this as a positive, there might be more to consider below the surface, both literally and metaphorically.
As of this writing, West Texas Intermediate oil, the benchmark oil for U.S. trading, was hovering near $32 a barrel, a huge rally after seeing negative numbers in late April. According to Reuters Columnist John Kemp, the number of rigs drilling for oil in the United States has dropped by 60% compared to late March. For trucking companies serving the oil fields hauling drilling equipment or fracking sand or water, or those delivering oil to refineries or finished petroleum products, this has meant less freight.
“But with futures prices back over $30 per barrel, if they rise much more, some drilling will start to become economic again, perhaps limiting further upside potential for prices,” wrote Kemp.
Despite the price rally, some are skeptical that oil prices with stabilize any time soon. WTI prices would have to stay in the $30 to $35/barrel range before some companies would be willing to start drilling again, even though by cutting production they are losing money. But if they ramp up and create a surplus like the one experienced in April, as COVID-19 pandemic slashed demand worldwide, prices could once again hit negative numbers.
The U.S. Commodity Futures Trading Commission (CFTC) warned of the possibility of negative oil prices again, pointing to that face that WTI futures contract for June expire soon.
“We are issuing this advisory in the wake of unusually high volatility and negative pricing experienced in the May 2020 physically delivered WTI contract, and related reference contracts, on April 20,” wrote the CFTC, adding that it is essential for futures commission merchants to “engage in robust risk management to manage effectively their activities of operating as FCMs and to protect customer funds.”
As of May 18, diesel prices were at $2.386 a gallon according to the U.S. Energy Information Administration, down $0.008 from a week ago and down 77.7 cents per gallon from a year ago. Gasoline prices, however, have started to rebound, at 1.878 per gallon, up 2.7 cents from last week.