July 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil pared gains during July when rising by $2.40 (+6.3%), to $40.71 per barrel. The July increase occurred within the context of a slightly weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 1.4 million barrel-per-day (BPD) jump in the amount of petroleum products demanded/supplied during May (to 16.1 million BPD, on par with volumes previously seen in mid-1987), and a drop-off in accumulated oil stocks (July average: 530 million barrels) -- although still well above the five-year average maximum.

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From the 3 August 2020 issue of The Energy Bulletin:

Oil posted a small gain in July, boosted by a steadily weakening dollar and OPEC’s restraint. Deep output curbs by OPEC+ have helped futures rebound from their plunge below zero in April, yet the unprecedented cuts will ease this month. US crude inventories have shown signs of shrinking and are currently sitting at their lowest since April.

Futures have remained in a tight trading range with rallies limited by the pandemic holding back demand. ExxonMobil said it only sees an oil consumption recovery well into 2021.

US crude oil inventories moved sharply lower during the week ended July 24th as exports and refinery demand climbed to multi-month highs. Commercial oil stocks fell 10.61 million barrels, the biggest draw since 2019. While the draw pushed stockpiles to 14-week lows, they remained more than 17 percent above the five-year average for this time of year. The inventory draw was concentrated on the US Gulf Coast, where stocks fell 10.46 million barrels, and on the US West Coast, where stocks fell 1.7 million barrels. Meanwhile, stockpiles at the NYMEX delivery point of Cushing, Oklahoma, climbed 1.31 million barrels.

US oil companies have increased production by 1.2 million b/d over the past six weeks as they restored wells shut earlier this year and start producing from others they had left unfinished as prices sank. Output bottomed at 9.7 million b/d in the second week of June but has since risen to 10.9 million b/d as activity starts to pick up in Texas.

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Selected highlights from the 31 July 2020 issue of OilPrice.com’s Oil & Energy Insider include:

ExxonMobil posts huge $1.1 billion loss. ExxonMobil reported a loss of nearly $1.1 billion, the largest quarterly loss in 36 years. Production was down 7 percent, year-on-year. Exxon said it’s working on cost-cutting plans in a “last ditch” effort to preserve its dividend, and CEO Darren Woods said that the company would not take on more debt.

Chevron announces worst loss in three decades. Chevron reported an adjusted loss of $3 billion, along with an impairment of $5.6 billion. That included writing off Chevron’s entire unit in Venezuela, worth about $2.6 billion. “We would need to see sustained economic recovery and much lower inventory levels before we would add capital back to the Permian or other basins,” Pierre Breber, Chevron’s finance chief, told Reuters. “We’re in a lower for longer world where demand is down and there’s ample supply.”

Dakota Access dampens Bakken prospects. The potential loss of the Dakota Access pipeline could stall the North Dakota shale formation’s rebound. Moving oil by rail would add $3 to $6 in costs for producers. Anecdotally, some companies are holding off on drilling until they know more about the fate of Dakota Access, according to Reuters.

Saudi Arabia to unveil September prices amid market pressure. Saudi Arabia is under pressure to lower the price of its oil, according to Bloomberg. Traders expect a price cut for the first time since April. Saudi prices typically set the tone for the market, so the unveiling of prices for September in the next few days will offer clues into the market direction.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

June 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended May’s gain when rising by $9.75 (+34.1%), to $38.31 per barrel in June. The May jump occurred within the context of a weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a nearly 3.6 million barrel-per-day (BPD) collapse in the amount of petroleum products demanded/supplied during April (to 14.7 million BPD), and a moderate increase in accumulated oil stocks (June average: 538 million barrels). 

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From the 6 July 2020 issue of The Energy Bulletin:

OPEC: The cartel’s oil production in June was at the lowest level since May 1991 during the Gulf War, and collectively meeting its promised cut. According to a Bloomberg survey, OPEC cut its output to 22.69 million b/d. Saudi Arabia met its promised cut, holding production to 7.53 million b/d. Saudi Arabia also met its additional voluntary reduction that phases out in July. While Kuwait and the UAE also met their promised cuts, they did not meet all of their voluntary cuts like Saudi Arabia did. To no one’s surprise, Angola, Iraq, and Nigeria did not meet their promised cuts. Of the three, Angola was the most compliant at 83 percent of its pledged cuts in June, while Nigeria hit 77 percent. Iraq remains the biggest laggard of the group.

Saudi Arabia has threatened to ignite an oil-price war unless fellow OPEC members make up for their failure to abide by the cartel’s recent production cuts, delegates said. Saudi energy minister Prince Abdulaziz bin Salman issued the ultimatum in recent weeks. He asked Angola and Nigeria to submit detailed pledges to carry extra oil-production curbs, delegates said. The hardline stance from OPEC’s de facto leader risks a new flare-up within the OPEC countries. It comes just months after Saudi Arabia waged a price war against longtime oil-market ally Russia following disagreements over how to supply global markets as the coronavirus spread.

OPEC+ is not discussing or planning changes to its production cut agreement, which should see the oil producers ease the cuts in August, Russia’s Energy Minister Alexander Novak said at an online conference on Thursday. OPEC+, led by Russia and OPEC’s top producer Saudi Arabia, agreed in June to extend the record production cuts of 9.7 million b/d by one month through the end of July. According to the original agreement reached in April, OPEC+ was to cut 9.7 million bpd in combined production for two months—May and June—and then ease these to 7.7 million b/d, to stay in effect until the end of the year. Then, from January 2021, the production cuts would be further eased to 5.8 million b/d, to remain in effect until end-April 2022.

Shale Oil: ConocoPhillips expects to start bringing back in July part of the oil production it had curtailed in the second quarter in response to the low oil prices. In April, when oil prices slumped to the low teens amid crashing demand in the pandemic and the Saudi pledge to flood the market with oil, ConocoPhillips reduced its 2020 capital expenditure for the second time in one month. They announced curtailment of some oil production in Canada and the US until market conditions improve. ConocoPhillips said it would voluntarily curtail 200,000 barrels of oil equivalent per day net until market conditions improve. The company reduced production at Surmont in Canada due to low Western Canada Select prices and production across its operations in US shale fields.

As much as 30 percent of shale drillers could go under if oil prices fail to move substantially higher, Deloitte said in a recent study, as quoted by CNN. The firm said these 30 percent are technically insolvent at oil prices of $35 a barrel. Right now, West Texas Intermediate is higher than $35 but not by much. Oil is currently trading closer to $35 than to $50—the level at which most shale drillers will be making money.

Banks have started cutting credit lines for shale drillers as they reassess their assets, and the products that they promised would be realized from these assets. According to calculations by Moody’s and JP Morgan, cited by the Wall Street Journal, banks could reduce asset-backed loan availability for the industry by as much as 30 percent, which translates into tens of billions of dollars.

Crude-by-rail shipments from the US Midwest to the West Coast fell 28 percent month on month to 157,000 b/d in April amid lower refining runs and plunging North Dakota oil production. The shipments were down from 211,000 b/d in April 2019. West Coast refineries would have an incentive to max out Bakken flows while prices are low, but a market source said the plants likely saw better waterborne prices from abroad. 

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Selected highlights from the 3 July 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Crude oil hit four-month highs on Thursday (7/2), aided by a tightening market and a better-than-expected U.S. jobs report. The caveat is that the jobs survey took place before the latest Covid-19 wave and the associated closures. Analysts still expect oil to face resistance to any further gains. “Gasoline has carried the load on recovery and demand, and it’s not clear whether that could continue into August and September,” Andrew Lebow, senior partner at Commodity Research Group, told Bloomberg. Oil prices retreated during midday trading on Friday.

OPEC+ scheduled to ease production cuts. OPEC+ is scheduled to ease production cuts beginning in August, and sources told Reuters that the group will likely refrain from an extension. Saudi Arabia also reportedly put pressure on Nigeria to increase its compliance. On Thursday, Russian energy minister Alexander Novak reiterated that position. “At present, there are no decisions to prepare any changes…Next, under the current agreements we should have a partial restoration of the volume of reductions starting August 1,” he said, according to TASS.

Shale drillers squeezed by banks. Lenders have tightened credit by as much as 20 percent in the latest credit redetermination period.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

May 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil bounced off April’s low when rising by $12.01 (+72.6%), to $28.56 per barrel. The May jump occurred within the context of a marginally weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a nearly 1.6 million barrel-per-day (BPD) decline in the amount of petroleum products demanded/supplied during March (to 18.2 million BPD), and a stabilization of accumulated oil stocks (May average: 531 million barrels). 

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From the 1 June 2020 issue of The Energy Bulletin:

Oil closed out May…on hopes demand for oil would continue to rise as economies reopen and crude production continues to fall. The status of the U.S.-China trade agreement is in doubt as relations continue to deteriorate and resurgence of the coronavirus as lockdowns are lifted will be a significant factor in the movement of oil prices during the next few weeks.

The major issue is how long it will take for the oil markets to balance.  The IEA estimates that demand for oil in May was down on the order of 25 million BPD from May of 2019 and that June’s demand will be down by 15 million. The increase in demand this month is based on the relaxation of restrictions in the U.S., Europe, India, and China. However, large sectors of demand, such as air travel, shipping, tourism, sports, and entertainment are unlikely to be much affected by the relaxations. New spikes in the virus, however, are certain to result in enhanced restrictions or more public reluctance to resume non-essential activities. Moreover, the coronavirus is spreading rapidly in many parts of the underdeveloped world which is bound to have a significant impact on economic activity and imports of non-essential products.

There are two parts to the oil supply story. First is the OPEC+ agreement to curtail 9.7 million BPD through June and 7.7 million through December. The other is the ongoing decline of U.S. shale oil which could amount to 5 million BPD or more by the end of the year.

OPEC oil output hit the lowest in two decades in May as Saudi Arabia and other members started to deliver a record supply cut.  A Reuters survey found that on average, the 13-member Organization pumped 24.77 BPD in May, 5.91 million BPD from April’s revised figure.

Saudi Arabia and several other members of OPEC are discussing the possibility of extending the current level of OPEC+ production cuts to the end of the year, but Russia could be the stumbling block. OPEC and allies will hold online meetings on June 9-10 to discuss if they should extend their production cuts or start tapering them. Russia is said to be determined to start easing oil output cuts in July, as agreed by OPEC+ in April.

Availability of storage for the excess crude production is still an open question. U.S. crude oil stocks grew by nearly 8 million barrels the week before last, but this may have to due to the “Armada” of Saudi oil tankers that were dispatched to America back when Saudis were waging a price war with Russia. Some analysts believe that the oil storage crisis is far from over. Ships full of crude are still anchored off the coasts of the U.S., China, Europe, and elsewhere. With most onshore storage sold out and refinery run rates across the globe still a long way off their usual pace, storage could still be a problem.

US shale oil production is falling so fast that even the EIA can’t keep up with the decline and has been making downward revisions to its production forecasts in recent weeks. U.S. oil production has fallen 12 percent since early March to 11.4 million BPD, according to the Energy Information Administration. These numbers should be suspect until final production numbers are available in about six weeks.

Drilling is now at the slowest pace in more than a decade as the pandemic-driven collapse in energy demand wipes out cash flow, jobs and entire companies. Drillers idled 15 oil rigs across the U.S. last week, bringing the tally to 222, the lowest since 2009, according to Baker Hughes. The Permian Basin of West Texas and New Mexico accounted for the bulk of the reduction, with 14 rigs taken out of service.

Oil companies have abandoned drilling programs and tossed out financial forecasts in the wake of the spiral that saw American crude prices turn negative in April. Bankruptcies are accelerating among the most heavily leveraged drillers, and even major oil companies such as Chevron are cutting jobs and adopting austerity plans to conserve capital.

The gap between the oil and equity markets and the real economy continues to widen. Over 40 million people have filed for unemployment. Corporate bankruptcies are accelerating. A real estate crisis is forming, with millions of people and thousands of businesses unable to pay rent and mortgages.

Consulting firm Rystad Energy is telling traders that the oil market was oversupplied only by around 16 million BPD in April so that the rapid shut-in of around 12 million BPD has erased a huge portion of the surplus. The supposed rebound in demand – of around 4 million BPD, according to Rystad – puts the market close to “balanced” in June. Such optimism, if true, gives traders a reason to push oil markets higher, but others are not so sure.

Oil prices are back at levels last seen in mid-March, prior to the shutdowns. “We find it hard to justify why prices are where they were on 11 March,” Standard Chartered wrote in a note last Tuesday. “We do not think expectations about the future have brightened significantly since this date.” The investment bank noted that the IEA’s projection for global demand in March was a slight decline of just 90,000 BPD for 2020. Now, the agency’s estimate is for demand to decline by 8.63 million BPD, “96 times more than the estimate on 11 March.” And yet, oil prices are trading in the mid-$30s, just as they were in March. 

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Selected highlights from the 29 May 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Oil prices have held onto the gains from the last few weeks, but the recent rally seems to have stalled as demand shows signs of not returning to normal any time soon. Meanwhile, U.S.-China tensions weighed heavily on financial and commodity markets this week.

U.S.-China tensions threatens $52 billion in energy sales. The Phase 1 trade deal between Washington and Beijing is at risk of falling apart. President Trump is set to make a major announcement on Friday regarding China, and amid escalating tension and China’s moves in Hong Kong, the actions will likely be punitive. China had previously pledged to make $52 billion in oil purchases over two years, a total that was always going to be hard to meet.

What will OPEC+ do next? Two conflicting reports surfaced this week, one claiming that Russia was considering extending the OPEC+ production cuts beyond June, while the other said the opposite – that Russia would push for loosening the cuts. Saudi Arabia appears ready to extend, but in Moscow some Russian oil companies may find an extension difficult.

Refineries hit by overcapacity. A wave of refining capacity built over the past few years has squeezed margins, and the downturn in the oil market could push uncompetitive facilities offline permanently.

Bearish EIA data halts momentum. The EIA reported a jump in crude oil inventories this week, made worse by a surge in imports. At the same time, production dipped by another 100,000 bpd.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

April 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil extended losses in April when falling by $12.66 (-43.3%), to $16.55 per barrel -- the lowest nominal price since March 1999. The April drop occurred within the context of a stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 66,000 barrel-per-day (BPD) decline in the amount of petroleum products demanded/supplied during February (to 19.8 million BPD), and a jump in accumulated oil stocks (April average: 509 million barrels). 

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From the 4 May 2020 issue of The Energy Bulletin:

The story of the coronavirus’s impact on the world’s economy has yet to be written. Around the world, billions of people are still quarantined or living under social separation rules that severely restrict economic activity. Until either a vaccine for the virus is developed and disseminated to the 7.6 billion of us, or a “herd immunity” arises under which some 60-70 percent of the world’s population has been infected by the virus, this story will go on. Last week parts of the US and Europe relaxed harsh stay-at-home mandates, which had stopped much economic activity.

This relaxation of the lockdown in the US and EU came with complex rules of social behavior that are supposed to slow the growth of the contagion. It will be several weeks before we know how well the new standards work, and even more important is whether a critical mass of people is willing to risk lives by engaging in “non-essential” economic activities such as going to shopping malls. If this vital mass does not form, then many formerly profitable commercial businesses will not be profitable until the epidemic is over, which could take years.

In the meantime, global air travel is virtually halted, although the Chinese claim it has started up again while giving few details. Many international borders are closed, and there is close to zero tourist industry in operation. Even more severe is that the global supply chain has been severely damaged, and many economic enterprises can no longer receive adequate supplies of raw materials, parts, or finished goods. In the past week, the specter of global food shortages have arisen.

The US economy contracted in the first quarter at its sharpest pace since the Great Recession as stringent measures to slow the spread of the novel coronavirus almost shut down the country. The drop in the GDP at an annual rate of 4.8 percent reported on Wednesday reflected a plunge in economic activity mostly in the last two weeks of March. The rapid decline in GDP reinforced analysts’ predictions that the economy was already in a deep recession and left economists bracing for a record slump in output in the second quarter.

With much of the economy paralyzed, the Congressional Budget Office has estimated that economic activity will plunge this quarter at a 40 percent annual rate. “The longer consumers are stuck at home and workers can’t get to their jobs, the greater the structural damage to the US economy — permanent loss of household income, permanent business closures, permanent job losses, reduced business investment — which would prevent a strong rebound,” said Gus Faucher, chief economist at PNC Financial Services Group.

With a flood of unemployment claims continuing to overwhelm many state agencies, economists say the job losses may be far worse than government tallies indicate. The Labor Department said Thursday that 3.8 million workers filed for unemployment benefits the week before last, bringing the six-week total to 30 million. But researchers say that millions of others have lost jobs but have yet to see benefits. Traffic congestion and hours worked in South Carolina, and other states in which lockdowns were eased late last week, indicate workers and consumers haven’t resumed their pre-pandemic routines. 

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Selected highlights from the 1 May 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Oil is set to post its first weekly gain in more than a month as production cuts and some relatively positive news regarding the coronavirus boosted sentiment. The OPEC+ deal begins today, while shut-in wells have begun to pile up in meaningful volumes.

Fed opens spigot for shale. The U.S. Federal Reserve revised its Main Street Lending Program to allow larger and more indebted companies to qualify for lending. The announcement received criticism from multiple corners. “The major changes announced today mirror the top requests of the oil and gas industry,” a congressional watchdog said. “That raises questions about how the changes promote the broader public interest -- especially when these companies will still have no real obligation to retain or rehire their workers.” Even the powerful American Petroleum Institute spoke out. “You can’t have capitalism on the way up and socialism on the way down,” an API executive said.

Shale production cuts rising. With U.S. storage about to hit tank tops in a matter of weeks and the world deep in the throes of the biggest pandemic in modern history, the inevitable has begun to unfold: The arduous and costly process of well shut-ins.

Oil and gas industry to lose $1 trillion. Oil and gas companies are set to lose $1 trillion in revenues this year, according to Rystad Energy.

Wells Fargo revives ‘bad loans’ unit. Wells Fargo has brought back a special department to handle bad energy loans. Some of the bankers involved previously worked on the same oil and gas loans issued by the bank, Reuters reports.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

March 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil tumbled by $21.33 (-42.2%), to $29.21 per barrel in March; for perspective, this price drop was exceeded only by a $27.25 fall in October 2008. The March 2020 slump occurred within the context of a substantially stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 407,000 barrel-per-day (BPD) decline in the amount of petroleum products supplied during January (to 19.9 million BPD), and a jump in accumulated oil stocks (March average: 458 million barrels). 

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From the 6 April 2020 issue of The Energy Bulletin:

“Last week saw one of the biggest price leaps in the history of the oil industry, with U.S. futures surging from around $20 a barrel at mid-week to a close of $28.34 on Friday.  The surprise surge came after President Trump tweeted Thursday morning that the Saudis and Russia were going to cut production by “10 million barrels or may be substantially more.” The tweet came after Trump talked with the Saudi crown prince.  Later in the day, Moscow weighed in to say that it was unaware of such an agreement and that the Saudis were making every effort to increase, not cut oil production.

“Analysts and the IEA were quick to point out that the coronavirus pandemic had already cut global oil demand by an estimated 20-30 million BPD or possibly more.  In the unlikely occurrence that OPEC+ could agree on production cuts totaling millions of barrels, any agreement to cut output would likely be too late and too little.  The market is grappling with an enormous oversupply.  Vitol, the world’s largest independent oil trader, says demand is set to fall by as much as 30 million barrels a day in April.

…

“The U.S. shale oil industry is contracting rapidly, but it will be a couple of months before the EIA can sort out just how much production has declined.  Six weeks ago, the discussion was about how much slower the growth of shale oil production would be this year.  Now the issue is how much it might fall.

…

“As part of the $2 trillion fiscal stimuli meant to resuscitate the U.S. economy, Congress allocated $454 billion to help underwrite the special lending programs.  This could generate up to $4.540 trillion in new lending (assuming 10x leverage for highly-rated assets}.  It now turns out that the first industry to benefit from direct Fed loans is the U.S. energy sector, some of which is facing near-certain bankruptcy, assuring that new loans will never be repaid.

“Global spending on oilfield equipment and services this year is expected to fall 21% from 2019 to $211 billion, the lowest level since 2005, according to a report to be released on Wednesday by consultancy Spears & Associates.  Spears’ estimate for 2020 spending is below industry outlays at the nadir of the last price crash in 2016, and less than half the 2014 peak of $473 billion.  The company, which surveys oilfield firms, evaluates company reports and models sales, historically has not publicly released its data.

“Oil is entering a period of unparalleled demand destruction this month that promises to transform the industry for years to come.  Daily consumption is forecast to plummet by 20 million to 22 million BPD from a year earlier.  The crash has already led to refiners slashing processing, drillers halting output, and storage tanks swelling across the world. “This will likely be a game-changer for the industry,” Goldman Sachs analysts including Jeffrey Currie and Damien Courvalin said in a March 30th note.  “It is impossible to shut down that much demand without large and persistent ramifications to supply.” 

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Selected highlights from the 3 April 2020 issue of OilPrice.com’s Oil & Energy Insider include:

China’s refiners increase processing. China’s refineries have started to increase processing, with runs set to increase by 755,000 BPD in April, a 10% month-on-month increase.

Schlumberger to cut workforce. Schlumberger said that it would implement widespread salary and job cuts.

BP slashes spending 20%. BP said it would cut spending by 20%, including a 50% cut in U.S. shale spending. “This may be the most brutal environment for oil and gas businesses in decades,” CEO Bernard Looney said in a statement.

Gas inventories rise. Warmer-than-average temperatures along with demand destruction have led to a spike in natural gas inventories in Europe. “There’s a chance we will see a collapse in prices in the U.S.,” Francisco Blanch, head of global commodities and derivatives research at Bank of America, told Bloomberg. “We are going to be weak on the demand destruction related to the virus, but the real issue is that we had a very warm winter and we are coming out with extreme high inventories.”

U.S. DOE to allow SPR storage. After a plan to buy oil for the U.S. SPR fell through, the Department of Energy is going to open up the SPR for leased storage. There is roughly 77 million barrels of capacity available.

Trump considers import tariffs on oil. The White House is reportedly considering placing tariffs on imported oil as a way of throwing aid to U.S. oil producers. The plan has met strenuous opposition from refiners and even the API, an oil lobby group that some say reflects the interests of the oil majors.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

February 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil dropped by $7.14 (-12.4%), to $50.54 per barrel in February. The decrease occurred within the context of a modestly stronger U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 300,000 barrel-per-day (BPD) decline in the amount of petroleum products supplied during December (to 20.3 million BPD), and a sideways move in accumulated oil stocks (February average: 444 million barrels). 

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From the 2 March 2020 issue of Peak Oil Review:

“As the coronavirus epidemic spreads to some 60 countries, the outlook for the oil industry and, indeed, the global economy is undergoing a sea change.  Oil prices and equities are dropping rapidly as transportation and business activity is already being curtailed in many parts of the world.  Brent futures settled at $50.52 Friday, down $7.98 on the week, and down 22.5 percent since January 20, when the commodities markets began reacting to the virus.  Forecasters are lowering their estimates of how much the growth in oil demand will fall this year, and some are suggesting that demand may even contract.  The IEA has the growth in the need for oil down to 825,000 BPD, but this could turn out to be optimistic. 

“As could be expected, demand for oil by the major Chinese companies CNPC and Sinopec dropped by 15 percentage points since January.  The independent Chinese refiners’ utilization rates have declined by 28 percentage points as compared to operations before the Chinese New Year.  Beijing is making a significant effort to increase its exports of oil products as domestic demand is clearly much lower than usual.

“The implications of what we may be facing are so enormous that if the epidemic spreads widely, the regular forces that drive oil prices and the economy may no longer obtain.  Should the demand for oil fall by millions of barrels per day due to lower global economic activity – a no-longer-unthinkable possibility – then OPEC decisions or central bank moves no longer carry much weight.  Beijing is already trying to buy its way out of the problem by showering money on its economy.

“With U.S. oil prices now down to about $45 a barrel, the prospects for much growth in U.S. shale oil production in the immediate future do not seem good.  Events are overtaking recent forecasts that shale oil will grow by 600,000 to 700,000 BPD in 2020.  Even without the virus phenomenon, some observers are saying that shale oil may be peaking this year because the industry is running out of good places to drill. This, combined with the lack of profitability for shale oil, suggests that the shale oil boom may slow markedly in the next year or so.” 

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Selected highlights from the 28 February 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Saudi Arabia seeks larger cut. Saudi Arabia is pushing OPEC to increase its production cut to 1 million BPD. Just a few weeks ago, OPEC’s Joint Technical Committee recommended additional cuts of just 600,000 BPD. Riyadh’s proposal would entail Saudi Arabia taking on the bulk of the new cuts. To date, Russia has been reluctant to sign on, but the sharp drop in prices increases pressure on the group.

China’s emissions fall sharply. Amidst an economic lockdown, China’s CO2 emissions have temporarily fallen by roughly a quarter.

BofA: Oil demand and supply to slow through 2025. A report from Bank of America Merrill Lynch sees oil demand slowing in the years ahead as EVs take hold. But it also sees supply growth slowing as U.S. shale slams on the brakes. The bank sees oil bouncing around between $50 and $70 through 2025.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

January 2020 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil fell by $2.30 (-3.8%), to $57.52 per barrel in January. The decrease occurred within the context of a marginally weaker U.S. dollar (broad trade-weighted index basis -- goods and services), the lagged impacts of a 182,000 barrel-per-day (BPD) decline in the amount of petroleum products supplied during November (to 20.8 million BPD), and a sideways move in accumulated oil stocks (January average: 431 million barrels). 

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From the 3 February 2020 issue of Peak Oil Review:

“Oil prices fell for the fourth straight week on mounting worries about economic damage from the coronavirus that has spread from China to around 20 countries.  Futures closed the month down about $10 a barrel since the beginning of the year, seeing the biggest January loss since 1991.  New York futures settled at $51.56 and London at $56.62.  The rapid price decline is causing much consternation with OPEC+ as some commentators are talking about $40 oil if the virus situation gets much worse.

“Global oil prices rallied at the end of last year due to announcements of cuts in production, followed by a boost in early January due to tensions in the Middle East.  But Brent crude is now down almost 17% from its early January peak, while U.S. natural gas prices are also under pressure due to a mild winter.  That is prompting a lot of investors to consider more in-depth, longer-term challenges for producers and refiners.  Some analysts warn that too many companies in the oil and gas sector have unsustainable balance sheets, weighed down by too much debt.

“The coronavirus-triggered fall in crude oil prices over the last few weeks has shaken some OPEC countries, including Saudi Arabia, to the realization that waiting until March 5-6, as scheduled, to potentially announce deeper production cuts may be too late.  OPEC’s core Middle East members typically announce how they have allocated their crude exports to customers between the 10th and 15th of each month.  March loading programs and allocations have already been set, so any OPEC+ decision would affect April shipments at the earliest.  Holding the meeting on its scheduled date of March 5-6 would push any changes to the May loading program.

“Beyond the physical market practicalities, the politics of agreeing on deeper cuts could be complicated.  OPEC and its 10 allies are one month into their latest production accord, which commits them to a 1.7 million BPD cut through the end of March.  The deal, signed at a highly fractious meeting in December 2019, saw Angola walk out of the talks at one point, and Iraq and Russia play hardball in negotiating their new quotas.  “Saudi Arabia, as expected, is leading by example, but should other producers fail to pull their weight or offer further adjustments, does the kingdom act unilaterally if the coronavirus impact escalates and spirals from here on out?” said an analyst with Medley Global Advisors.

“Even with Libya’s oil production plummeting by nearly 1 million BPD due to a port blockade, oil prices have seen downward pressure over the past week as fears of oil demand destruction currently outweigh supply outages.  Last week’s EIA inventory report was not supportive, reporting a 3.5 million build during the seven days to January 4th.  According to oil market analysts, until the impact of the Wuhan virus on the Chinese economy and oil demand becomes clearer, market participants will continue to be spooked by the specter of waning oil demand during the season when demand is weakest.

“The Phase One trade deal between the U.S. and China may end up being exports on paper only—at least as far as energy is concerned.  Analysts concur that the Chinese promise to buy an additional $52.4 billion worth of U.S. energy products in 2020 and 2021 on top of the 2017 levels is most likely unachievable, even if China intends to fulfill all its pledges in the deal.  With the coronavirus epidemic leaving a large share of Chinese industry, retail, and non-essential transportation shut down for an indefinite period, demand for oil in China and even around the world is bound to slow significantly.” 

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Selected highlights from the 31 January 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Oil posted its largest monthly loss since May 2019, as fears of the coronavirus continue to rise. The 15% price decline is also the worst January performance since 1991, according to Bloomberg. The oil market is “troubled by both rising demand worries and rising fuel stocks,” said Ole Sloth Hansen, head of commodities strategy at Saxo Bank A/S in Copenhagen. “It’s going to take a firm commitment by OPEC+, or rising geopolitical tensions, to achieve a sustained recovery.”

Bernstein: Chinese oil demand growth at just 100,000 BPD. China’s oil demand could grow at just 100,000 BPD this year due to the coronavirus, according to Bernstein. That would make it the slowest expansion in consumption in nearly 20 years. The firm previously predicted 350,000 BPD of growth.

Investors warn industry not to move on Trump’s deregulation. A group of 58 companies, including institutional investors, representing around $113 billion in assets, warned the energy, timber and mining industries not to move aggressively to take advantage of the Trump administration’s wide-ranging deregulatory campaign. The investors said that doing so would put investors at “significant risk of public backlash and stranded assets, should these actions be legally challenged or protections be restored by the courts or by future administrations.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

December 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose by $2.85 (+5.0%), to $59.82 per barrel in December. The increase occurred within the context of a marginally weaker U.S. dollar (broad trade-weighted index basis, which now accounts for the value of both goods and services), the lagged impacts of a 551,000 barrel-per-day (BPD) rise in the amount of petroleum products supplied during October (to 20.8 million BPD), and a moderate drop in accumulated oil stocks (December average: 442 million barrels). 

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From the 30 December 2019 issue of Peak Oil Review:

Gold prices rose and an index of global equity markets hit an all-time high last week as a year-end rally on Wall Street increased optimism over a U.S.-China trade agreement.  Oil rose to three-month highs, buoyed by a report showing lower U.S. crude inventories, hopes the pending Sino-U.S. trade deal will soon be signed, and efforts by OPEC to curb crude supply.

U.S. unemployment continues to fall, and wages are starting to climb in the wake of labor shortages.  U.S. consumer purchases had a banner year as on-line shopping set a record.  The Chinese cabinet approved a plan to lower tariffs for all trading partners on more than 859 types of products to below the rates that most-favored nations enjoy.

The only dark spot on the horizon for the U.S. economy is the report that U.S. durable goods orders fell in November -- mainly because of a decline in orders for military equipment, which fell 35%.  However, through eleven months this year, durable goods orders were up 0.7% from the same period in 2018.  The Dallas office of the Federal Reserve is worried about the outlook next year for shale oil in its region.

With Brexit coming soon, strikes in France, and Germany's growth slowing, the outlook for the European economy is uncertain.

The prospects for China and its insatiable demand for oil are the great unknown.  China's top five oil suppliers -- Saudi Arabia, Russia, Iraq, Brazil, and Oman -- each delivered record high volumes of crude to China in November, propelling the crude import volume to a new high of 11.18 million BPD.  Much of this crude is going to oil products exports and does not reflect domestic demand. 

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Selected highlights from the 3 January 2020 issue of OilPrice.com’s Oil & Energy Insider include:

Oil prices spiked immediately after the U.S. killed Iranian General Qassem Soleimani on Thursday. Soleimani, as head of the Quds force of the Revolutionary Guard, was a very powerful Iranian official, often likened to a shadow foreign minister. Iran promised “severe retaliation,” and many analysts fear a broader regional war. At a minimum, attacks on U.S. military installations in the Middle East are expected. Brent prices shot up by more than 3%.

U.S. oil workers leaving Iraq. Dozens of workers in the southern oil fields in Iraq are leaving the country and the American embassy urged all U.S. citizens to leave the country immediately. Iraqi officials said production would not be affected.

Supply risks? The big question at this point is how Iran might respond. Rapidan Energy said that the vessels and oil facilities are at risk. “[T]he risk of another major attack against Gulf oil vessels or facilities is now above 50%,” the firm said.

Equity markets sink on attack. Equity markets fell after the attack on Soleimani, interrupting the bullish mood for stocks. The conflict could “dash market hopes for a rebound of the global economy that is still to emerge from under the cloud of the U.S.-China trade war,” Valentin Marinov, head of G-10 currency research at Credit Agricole SA, told Bloomberg. “Risk sentiment should remain fragile also because central banks may be slow to respond or simply no longer have the arsenal to respond in an adequate way.”

$200 billion in shale debt due in next four years. Roughly $200 billion in North American oil and gas debt will mature in the next four years, according to the Wall Street Journal, which includes $41 billion due this year. More than 200 companies have already filed for bankruptcy since 2015, but that number will continue to rise as drillers struggle amid the crushing weight of debt. The huge obligations will force drillers to cut spending, potentially bringing the shale boom to a halt.

Russia’s oil production hits post-Soviet record. Russia appears to be defying the OPEC+ deal, ramping up production to a new post-Soviet record high last year. According to Bloomberg, output exceeded its agreed upon limit in 9 out of 12 months in 2019.

OPEC production declines. OPEC production declined in December to 29.55 million BPD, according to Bloomberg, down 90,000 BPD from a month earlier.

Problems with new IMO compliant fuel. Reuters reports that some routine tests have turned up problems with new low-sulfur fuels. The new IMO rules took effect on January 1, requiring lower sulfur concentrations. The rules are expected to cut 77% of sulfur oxide emissions from the sector. But the implementation could be a bit rocky at first. Marine fuel suppliers “are struggling with sediments,” a specialist told Reuters.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

November 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil rose by $3.01 (+5.6%), to $56.97 per barrel in November. The increase occurred within the context of a marginally weaker U.S. dollar (broad trade-weighted index basis, which now accounts for the value of both goods and services), the lagged impacts of an 841,000 barrel-per-day (BPD) drop in the amount of petroleum products supplied during September (to 20.2 million BPD), and a moderate rise in accumulated oil stocks (November average: 449 million barrels). 

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From the 2 December 2019 issue of Peak Oil Review:

OPEC oil output fell in November as Angolan production has slipped due to maintenance and Saudi Arabia kept a lid on supply to support the market before the initial public offering of state-owned Saudi Aramco in December.  Renewal of the OPEC+ production cut is becoming controversial.  At a cartel meeting scheduled for this week, Saudi Arabia will likely tell fellow producers in the pact that the Kingdom would no longer tolerate and compensate for cheating on assigned production quotas according to people with knowledge of the current Saudi position.

While other members in the cartel, notably Iraq and Nigeria, have repeatedly exceeded their respective production caps by more than 100,000 b/d, Saudi Arabia has not only stuck with its share of the cuts, but has also over complied by more than 400,000 b/d-bringing the total reduction of the Kingdom to more than 700,000 b/d in recent months.  The Saudis are pressuring non-compliant cartel members to fall in line with their share of the cuts, instead of pushing aggressively for a deeper overall cut to rebalance the market.  Deeper cuts likely would mean the Saudis would have to take the lion's share of cuts, again.

Moscow too has problems with extending the OPEC+ cut at this time.  Russian oil companies prefer to keep their production restriction quotas until March, when the current OPEC+ cuts expire, and discuss an extension then, signaling that Russian producers don't want deeper cuts or any major changes to the pact at this week's meeting.

Russian energy minister Novak said Thursday that Russia is preparing calculations to exclude condensate from its OPEC+ quota but has so far yet to take a decision.  He said Russian natural gas condensate output would increase as new gas production came on stream, and as it is not exported, it should not be included in the deal.  Under the current OPEC+ agreement, Russia committed to cut around 230,000 b/d from its October 2018 crude and condensate output of 11.42 million b/d.  Compliance has fluctuated significantly this year, with Russia over-complying for a few months in the summer due to the Druzhba pipeline contamination.  Since August it has failed to comply, however.  Novak said last week that producers are planning to comply in November.

The major forecasters see an oil supply surplus next year, but those bearish outlooks largely depend on the growth of US shale oil production in 2020.  Financial struggles in the US shale industry are well-known.  As Bloomberg reported, some drillers have recently seen their credit lines reduced, limiting their access to fresh capital.  Twice a year, in the spring and fall, banks reassess their credit lines to shale drillers and decide how much they will authorize companies to borrow.  This time around is expected to be the first time in roughly three years that lenders tighten up lending capacities.

In 2019 through the third quarter, 32 oil and gas drillers filed for bankruptcy, according to Haynes and Boone.  Since the end of September, several other drillers have filed too, including last Monday, natural gas producer Approach Resources.  This pushed the total number of bankruptcy filings of oil and gas drillers from the beginning of 2015 to over 200. 

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The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.

October 2019 Monthly Average Crude Oil Price

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The monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil nudged down by $2.98 (-5.2%), to $53.96 per barrel in October. The decrease occurred within the context of a modestly weaker U.S. dollar (broad trade-weighted index basis, which now accounts for the value of both goods and services), the lagged impacts of a 320,000 barrel-per-day (BPD) rise in the amount of petroleum products supplied during August (to 21.6 million BPD), and a moderate rise in accumulated oil stocks (October average: 439 million barrels). 

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From the 4 November 2019 issue of Peak Oil Review:

“OPEC's oil production jumped by 690,000 BPD from September to 29.59 million BPD in October, as the Saudis saw their production surge by 850,000 BPD, to 9.9 million, according to the Reuters survey.  The Saudis are now pumping as much oil as they did before the attack in mid-September.  OPEC+ will, at the very least, extend production curbs beyond the March 2020 deadline.  Analysts believe any increase in OPEC+'s production in the immediate future would send oil prices "into the abyss" and is not in line with the group's "long-held commitment to stabilize the oil market."

“The course of U.S. shale oil production over the next five months will be important to what OPEC+ does this winter.  Russia's Deputy Energy Minister Sorokin said last week that Russia is monitoring the growth in U.S. shale oil production and that there has been a significant slowdown over the past three-four months.  He noted that drilling efficiency has stalled over the past two years.

“The Trump administration, however, still sees the U.S. shale oil boom barreling ahead, despite slowing production, falling rig counts, and investment in new production sagging.  Energy Secretary Perry said last week that U.S. shale production has turned the world "on its head," and Goldman Sachs Group Inc. is "off a bit" in a report last week saying that the bonanza is fading.

“The downturn in shale drilling has been so steep and fast that oilfield companies are taking the unprecedented step of scrapping entire fleets of fracking equipment.  With almost half of U.S. fracking machinery expected to be sitting idle within weeks, shale drillers are retiring truck-mounted pumping units and other equipment used to fracture shale rock.  In previous market slumps, frackers parked unused equipment to await a revival in demand; this time it's different, gear is being stripped down for parts or sold for scrap.

“As oil prices remain low, talk has begun about the outlook for Texas' economy.  According to a recent Reuters report, smaller independent oil and gas producers in the state are struggling to get loans from banks as the latter become increasingly wary of the ability of the borrowers to return the money when the time comes.  Jobs in the Texas oil and gas industry are falling, too. The Houston Business Journal reported this month that September saw a 1,100 decline in the number of jobs in the mining and logging sector-the category that includes oil and gas jobs.

“Conventional oil and gas discoveries have fallen since the shale boom and the subsequent oil price collapse.  In fact, they've fallen to their lowest level in 70 years.  This year has seen new discoveries of nearly 8 billion barrels of oil "equivalent" (which includes natural gas) compared to 10 billion barrels of oil equivalent discovered last year.  But what's most striking is that discoveries aren't even close to keeping pace with the loss of conventional resources.  According to Rystad, the current resource replacement ratio for conventional oil is only 16 percent.  In other words, only one barrel out of every six consumed is being replaced with new resources.

“Given that the world currently consumes some 35 billion barrels of oil per year, it is difficult to understand the optimism for the future of the oil industry.” 

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Selected highlights from the 1 November 2019 issue of OilPrice.com’s Oil & Energy Insider include:

Trade war hurdles remain despite soothing words. President Trump has raised expectations that a partial trade deal is all but a done deal, but hurdles remain. Reuters reports that Trump’s insistence on China buying as much as $50 billion in farm products – more than twice as much as China bought in the year before the trade war – is a sticking point. Bloomberg also reported that Chinese officials are not optimistic about a comprehensive deal, as they do not trust Trump to stick to the terms of any agreement. Still, press reports suggest there is momentum in the near-term for a partial deal.

Trump admin may back off auto freeze. The Wall Street Journal reports that the Trump administration is reconsidering its freeze on fuel economy standards, and instead might opt for 1.5 percent annual increases, putting it closer to the Obama-era proposal.

Oilfield services scrap equipment. Bloomberg reports that the surplus of fracking equipment is being stripped for parts and sold off, rather than merely being idled. The industry is expected to use around 13 million horsepower at the end of 2019, out of 25 million horsepower available. Bloomberg reports that around 2.2 million horsepower – about 10 percent of industry capacity – is headed for the scrap heap.

China manufacturing data contracts sharply. Factory data from China showed a sixth consecutive month of contraction, and activity fell faster than expected. “We expect the official manufacturing PMI to remain sluggish in coming months, the growth slowdown could gather pace, and markets could become more volatile in coming months,” said analysts from Nomura in a note. New data on Friday, however, was more positive.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.