With oil recovering $70/bbl, the glory days are back! OK, that’s not exactly true, but $30/bbl feels a lot better. What’s going on?

At the trough of the lockdown, it is estimated that worldwide demand for oil was down 35 mmbo/d. That’s a whopping 35%! And while production cuts in May by OPEC+ of 9.7 mmbo/d, plus an estimated 3 mmbo/d from the U.S and Canada shut ins has helped, and as mobility data shows that driving is returning, we still have a long way to go to get back to even 90% of regular demand.

The weekly EIA petroleum status report is a great resource to assess how US supply-demand trends are evolving and may shed light on the trend for the rest of the world. Last week: Total products supplied over the last four-week period averaged 15.5 million barrels a day, down by 22.8% from the same period last year; motor gasoline was down by 33.0%; Distillate fuel was down by 17.3%, and Jet fuel was down 68.5%. Overall, as refineries run at 67.9% of capacity and inventories are 10% above 5 year averages, imports were down 26%.

In short, while the market may not be balanced and it will be a bumpy ride as all the oil from storage starts coming back into the market and depressing prices, producers have responded with shut ins and banks (to date) seem to be playing ball with covenant relief. To be clear, drilling and completions won’t come back until worldwide shut ins are 0 and storage levels come way down, but merger discussions that were in progress at the end of last year can restart now that oil is back to $30/bbl and companies equity holders have some breathing room from the banks.  But make no mistake, these marriages of convenience are simply to eliminate G&A and kick the can down the road in survival mode.  We are a long way from thriving, in spite of “the historic increase in oil price!!”