The brief rebound in oil prices was never going to last in the current environment, and as the global crude glut nears historic highs, prices are heading towards $20
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Friday, March 27th, 2020
Markets rallied this week as the U.S. Congress appears poised to pass a $2 trillion stimulus plan. Jobless claims in the U.S. topped 3 million, with economists seeing unemployment nearing Great Depression levels in the coming months. Meanwhile, despite the rally for equities, oil prices did not hold up, with WTI back down close to $20 per barrel as the historic glut continues to worsen.
SPR plan scrapped. The U.S. Department of Energy withdrew its plan to buy 77 million barrels of oil for the strategic petroleum reserve (SPR) after funding for the plan was removed from the $2 trillion stimulus plan.
Investors pressure majors to cut dividends. The top five oil majors added $25 billion in debt last year, while hiking dividends. Now, on the ropes with oil in the mid-$20s, debt will accumulate much faster. More investors are calling for a cut to dividends. “Long term, it is appropriate to cut the dividend. We are not in favor of raising debt to support the dividend,” Jeffrey Germain, a director at Brandes Investment Partners, told Reuters.
Half Latin American oil uneconomic. “Latin America’s flowing production is over 7 million barrels per day. At current prices, we estimate that half is non-economic, taking into account all costs, including transportation and taxes,” Ruaraidh Montgomery from oil research firm Welligence, told Reuters.
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European gas inventories at record high. As of March 1, storage for gas in Europe was 60 percent full, the highest ever recorded at the start of March.
Occidental cuts worker pay. Occidental Petroleum (NYSE: OXY) cut salaries for its U.S. workers by 30 percent.
Dakota Access loses court case. The Standing Rock Sioux Tribe won a major victory in federal court this week, with a judge ordering a full environmental impact statement for the Dakota Access pipeline. The project owned by Energy Transfer Partners (NYSE: ET) has already been operational for three years. The decision could potentially lead to the shutdown of the pipeline.
Pompeo pressures MbS on oil price war. Secretary of State Mike Pompeo spoke with Saudi Crown Prince Mohammed bin Salman by phone this week, asking for the Saudis to pull back from the price war. Pompeo urged Riyadh to “rise to the occasion and reassure” energy markets at a time of economic uncertainty.
Senators accuse Saudi Arabia of economic warfare. A group of Republican senators sent Sec. of State Mike Pompeo a letter, accusing Saudi Arabia of economic warfare because of Riyadh’s decision to increase oil production. The letter said the U.S. could explore antitrust authority as well as revisit support for the war in Yemen, a clear threat to Saudi Arabia.
Saudi Arabia struggling to find buyers. Saudi Arabia is struggling to find buyers for extra oil as demand collapses. Royal Dutch Shell (NYSE: RDS.A), China’s Unipec, Finland’s Neste, some Indian refiners and other U.S. refiners are taking less crude from Saudi Arabia, according to Reuters. Taken together, the inability to find buyers reduces the odds of Saudi Arabia ramping up production aggressively to over 12 mb/d.
Largest shut in of production in 35 years. In certain areas oil prices is trading in single digits. Bloomberg notes that Wyoming Sweet oil was trading at $1.75 per barrel this week, forcing some small producers to shut in. That could happen in many places around the world. “We need to cut crude supply by 10 million barrels a day pretty quickly,” Russel Hardy, the head of top independent oil trader Vitol Group, told Bloomberg. “Oil prices will need to go lower, to bring the prices to a level that triggers a response.”
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20 mb/d surplus. New estimates from a series of oil market analysts put the drop in demand from the pandemic at about 20 mb/d, a figure that is dramatically larger than estimates from as recently as a week ago. Goldman put it at 18.7 mb/d. It is the largest decline in history by far, and one so large that a return of OPEC+ cuts would not address.
China struggles to restart amid global recession. The worst of China’s pandemic is over, but the restart of factories in China is running into trouble as the rest of the world goes into lockdown and cancels purchases of a variety of Chinese goods. “The unprecedented shutdown of normal economic activity across Europe, the U.S. and a growing number of emerging markets is certain to cause a dramatic contraction in Chinese exports, probably in the range of a 20-45% year-on-year drop in the second quarter,” said Thomas Gatley, senior analyst at research firm Gavekal Dragonomics.
Plastics industry seeks roll back of bag bans. Producers of plastic are lobbying to reverse plastic bag bans across the United States, using the pandemic as a reason to allow more disposable plastic.
Oil storage filling up. The world is estimated to have between 0.9 and 1.8 billion barrels of oil storage capacity, with the industry using 71 percent currently. But crude qualities cannot be stored together, and there are other logistical bottlenecks preventing full use of all storage facilities. Traders told Reuters that storage in the U.S. could reach capacity by May or June. Canadian output could begin to fall in April as storage maxes out.
Canadian oil sands shut ins begin. Western Canada Select is trading at around $9 per barrel, forcing some shut-ins. Suncor Energy (NYSE: SU) said it would shut in one of its trains at its Fort Hills project.
Gasoline prices plunge. $1 gasoline is popping up in a growing number of regions in the U.S. Nationally, retail gasoline prices are set to average $1.49 per gallon by mid-April. “You almost can’t even give it away,” Paul Bingham, head transportation economist at IHS Markit Ltd., told Bloomberg. “The price elasticity has totally changed. It’s full-on demand destruction.”
Petrobras to cut spending by 30 percent. Petrobras (NYSE: PBR) said it would cut 2020 spending by 30 percent to $8.5 billion and lower its production by 100,000 bpd. That includes shutting in shallow water production of 23,000 bpd.
Iraq asks IOCs to cut spending by 30 percent. Iraq asked four international oil companies to lower their spending by 30 percent, a list that includes Eni (NYSE: E), ExxonMobil (NYSE: XOM), Lukoil and BP (NYSE: BP). The request would ease a burden on Iraqi budgets.
By Josh Owens for Oilprice.com
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