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Friday, May 15th, 2020

Hello all,

Welcome to Energized, your weekly look into the geopolitics, news, and happenings of energy markets.

Before diving into this week’s content, we’d like to remind you to join over 400 members in our Energized LinkedIn Group. We will be releasing frequent news and snippets of Energized newsletters through the group. We hope to see you there. Also, if you haven’t already, visit our website to gain access to our free Oil 101 introductory course, our popular series of mobile-ready videos describing “How the industry works.” Ready for more? Check out our in-depth Oil 201 course which covers exploration, drilling, production, well completions, and refining. If your company or group is interested in Oil 101, let’s talk. We license our courses for use as internal training for sales, IT and operations teams. Think you know someone who would enjoy this newsletter? Pass it on! They can subscribe and access our Energized archives. Finally, be sure to check out the 2019 Energy Recap for a quick refresher on 2019 content.

Now, onto the May spotlight issue where we look at industry data, analyses, company opinions, and more to determine consensus opinions on what participants are saying about COVID-19 and what a recovery looks like for the oil and gas industry.

Energized!

Curated weekly oil and gas newsletter

May Spotlight Issue:

Can Oil and Gas Recover From COVID-19?

For earlier insight on the impact of the coronavirus on the oil and gas industry and the industry’s response, please read Energized #48 , Energized #49, and Energized #53, the April Spotlight Issue which discussed COVID-19 in oil and gas.

The index of this spotlight issue is as follows:

Macroeconomic

Consensus: Oil and gas recovery begins in Q3 2020, complete by year-end 2021.

+ EIA Lowers 2020 Oil Demand Forecast Amid High Uncertainties – Oil & Gas Journal

+ Short-Term Energy Outlook: Global Petroleum and Other Liquids – EIA

There’s a lot to unpack from the EIA’s latest Short Term Energy Outlook, but for starters, it’s easy to conclude that the EIA has an optimistic outlook about 2020 and 2021 for the oil and gas industry.

Without a doubt, the EIA’s most notable bold prediction is that 2021 global GDP compared to 2020 will grow 6.7%. This prediction is based on the assumption that the worst of the pandemic occurs in the second quarter 2020, there is a swift economic recovery that leads to consumption outpacing production, which leads to rising prices, which leads to a more globally connected and consumer-driven economy.

Global Petroleum and Other Liquids
	2018	2019	2020	2021
Supply & Consumption	(million barrels per day)
Non-OPEC Production	64.04	65.97	63.61	64.38
OPEC Production	36.78	34.61	31.58	33.35
OPEC Crude Oil Portion	31.44	29.27	26.57	28.44
Total World Production	100.81	100.58	95.19	97.73
OECD Commercial Inventory (end-of-year)	2,863	2,888	3,237	3,017
Total OPEC surplus crude oil production capacity	1.56	2.52	4.68	3.73
OECD Consumption	47.63	47.36	42.27	45.37
Non-OECD Consumption	52.33	53.38	50.32	54.15
Total World Consumption	99.97	100.74	92.59	99.53
Primary Assumptions	(percent change from prior year)
World Real GDP	2.9	2.0	(4.1)	6.7
Real U.S. Dollar Exchange Rate	0.5	2.1	2.4	(1.9)

Data Source: Short-Term Energy Outlook, May 2020, U.S. Energy Information Administration

To illustrate, the EIA sees liquid fuels consumption falling 20% year-over-year in Q2 2020, but only around 8% on average for 2020. It sees 2020 consumption average 92.6 million bpd and production average 95.19 million bpd, both down from 2019 levels, before consumption of 99.53 million bpd outpaces production of 97.73 million bpd in 2021.

The EIA’s forecast of higher prices and consumption returning to near-2019 levels isn’t a surprise once you realize the generous assumptions it is making. A 2 million bpd production deficit in 2021 culminates into Brent prices reaching $54 per barrel by the end of 2021, all powered by a roaring global economy.

Aside from the large scale predictions, the EIA assumes that US shale production falls in 2020 and then falls further in 2021, which limits supply and slowly erodes the unprecedented amount of inventories.

The EIA also is assuming that inventory levels peak in April. “EIA expects global liquid fuels inventories to draw at an average rate between 2.5 million b/d and 3.0 million b/d from the third quarter of 2020 through the end of 2021, given the implementation of OPEC+ production cuts beginning in May, economically driven reductions in U.S. oil production, and a return of global oil demand. Draws of this magnitude would largely work off the inventory builds accrued during the first half of 2020.”

In sum, the EIA is assuming a lot goes right with these predictions, so it’s no surprise that it concludes oil will begin recovering from COVID-19 in the second half of 2020 and then essentially be fully recovered by year-end 2021. The EIA could very well be right with its prediction, but it’s important to understand the underlying assumptions that are driving its forecast.

+ IEA: Oil Market Outlook Improved, Major Uncertainties Remain – Oil & Gas Journal

+ Oil Market Report – May 2020 – IEA

The IEA’s monthly report has a more cautionary tone than the EIA’s.

The IEA expects 2020 demand to be 91.2 million bpd, slightly less than the EIA’s estimate. The IEA states that April demand fell by 25.2 million bpd year-over-year, which is significantly higher than the EIA’s estimate. However, the IEA expects only a 21.5 million bpd decline in May and a 13 million bpd decline in June. Some easy math tells us that to get to its 2020 full-year production decline average of 8.6 million bpd would mean some serious increases in demand in the second half of the year to offset the first half of the year, and especially the second quarter. Turns out, the IEA is basically saying second-half demand will only be down 4.6 million bpd.

Similar to the EIA, the IEA expects U.S. production declines to be one of the largest contributors to lower supply in 2021.

What makes the IEA’s forecast more pessimistic than the EIA’s is that prices remain pressured because demand falls by an average of 8.6 million bpd in 2020 whereas supply could only fall 3.3 million bpd even with OPEC+ production cuts and non-OPEC declines in production.

On the downstream side, the IEA thinks that “the peak decline for global refining activity has shifted to May as April throughput estimate was revised up on new data and higher demand.”

Upstream, Midstream, and Downstream Corporations

Consensus: The industry is divided on the long-term potential of oil and gas, gas remains stronger than oil, refiners are optimistic about demand picking up.

+ Can Oil Recover From Coronavirus? An Industry Debate is Underway – The Houston Chronicle

Shell and ExxonMobil rarely agree on the long-term future of the industry.

ExxonMobil has been steadfast in striving to be the most efficient operator whereas Shell is now shifting from its “focus on the customer” strategy to alternative energy sources and power investments.

Shell’s CEO goes as far as to question whether demand will ever get back to where it was, quite the contrast to the optimistic predictions from the EIA and the positive but slower recovery presented by the IEA. Shell’s caution towards oil explains its transition to more natural gas, LNG, and renewable investments in recent years.

Meanwhile, ExxonMobil continues to pound the table that there’s a great deal of long-term opportunity in oil and gas which overpowers the headwinds of the current crisis to provide a comforting light at the end of the pandemic tunnel.

Only time will tell which strategy and opinion is better, but all oil majors are hurting right now.

+ Kinder Morgan Sees Natural Gas as Bright Spot, Remains Confident in Transport Contracts – Natural Gas Intel

Throughout the course of the pandemic, natural gas prices have remained much less volatile than oil, adding stability to energy companies involved in predominately gas so that they can survive the current crisis without losing sight of their long-term growth plans.

Kinder Morgan’s business model is built around counteracting volatile commodity prices by generating as much revenue from predictable fee-based or regulated customers as possible. More than 90% of Kinder Morgan’s cash flow comes from “take-or-pay and fee-based” sources. These contracts allow Kinder Morgan to remain insulated from short-term volatility. For example, natural gas volumes were actually up 8% quarter over quarter and financial performance would have been better than Q1 2019 if you exclude the company’s Cochin sale, part of a larger deal with Pembina Pipeline. First-quarter earnings were down just 5% year-over-year.

+ Valero plans 70pc utilization in second-quarter – Argus Media

“Valero was optimistic that gasoline demand would recover this summer from a historic late-March plunge under travel and other restrictions aimed at containing the spread of Covid-19, executives said on a quarterly earnings call. ”

“”I think there probably is a pent up demand to get out of their houses, to get mobile and to shop again and to get to restaurants again,” Gorder said.”

“Jet demand would remain low until a vaccine or other medical solution restored consumer confidence in air travel, the company said.”

“”The jet demand destruction was just so severe,” Simmons said. “I think we are seeing, at least this week, starting to see some indications in the market that people in the industry, including ourselves, are making some adjustments to their operations to bring the diesel yields down.””

Airlines

Consensus: Widespread government loans. Liquidity and financial health take precedent with revenue and travel demand collapsing. Demand isn’t expected to pick up for at least a year. Full recovery expected to take years.

+ United sees “zero” travel demand, says major layoffs loom if bookings don’t pick up by fall – USA Today

The transportation sector accounts for around 70% of oil demand. A big part of that is jet fuel used by airlines.

United Airlines CEO, Scott Kirby, “said travel demand is essentially “zero” and that the airline is bracing for that to be the case for the rest of the year and into 2021.”

“If travelers don’t return in numbers, Kirby said, United will have no choice but to reduce the number of workers to match the sharply depressed number of flights and travelers.”

+ Airline industry not likely to recover for at least a year: Southwest CEO – Reuters

Yesterday, Southwest’s CEO predicted that the airline industry wouldn’t recover to pre-coronavirus levels for at least six to 12 months after no major improvement has been realized in the second quarter.

Like many airlines, Southwest is taking government support in the form of grants and loans to get through the crisis. “Under the terms of government payroll support, airlines cannot lay off employees before Sept. 30. If demand remains weak, Southwest has said it may need to reduce its workforce after that date and re-think its fleet.”

+ Warren Buffett Sells Airline Stocks Amid Coronavirus: “I Made a Mistake” – Forbes

“”The world has changed for airlines,” Buffett said, noting that the industry has been “really hurt by a forced shutdown” due to the coronavirus.”

“::I don’t know that three, four years from now people will fly as many passenger miles as they did last year,” Buffett warned. “You’ve got too many planes.””

Retail Sales

Consensus: Utter collapse, but will pick up as economies reopen.

+ Retail Sales Plunge a Record 16.4% in April Amid COVID-19 – Yahoo Finance

Retail sales figures came out this morning and were worse than expected.

“With the majority of the country still under strict stay-at-home mandates as a result of the COVID-19 pandemic, U.S. consumer activity took another massive blow in April following a record plunge in March.”

(Yahoo Finance/David Foster)

“Headline retail sales nosedived a record 16.4% in April which was much worse than the 12% plunge expected by economists. March retail sales was revised to a decline of 8.4% from the previously reported 8.7% decrease. Core retail sales, excluding the volatile auto and gas components, tumbled 16.2% following a decrease of 2.8% in the prior month. Economists were predicting a 7.6% drop in core retail sales for the month.”

Natural Gas

Consensus: Industrial demand rebounds, power generation falls heavily in 2021.

+ Short-Term Energy Outlook: Natural Gas -EIA

According to 2018 data, the electric power industry makes up 35% of U.S. natural gas consumption, followed by 33% for the industrial sector, 17% for the residential sector, 12% for the commercial sector, and 3% for the transportation sector.

US natural gas consumption and production are both expected to decrease in 2020 compared to 2019 and then decrease further in 2021 compared to 2020.

The industrial sector is expected to have the sharpest demand decline of any sector to the tune of 7% in 2020 compared to 2019. That being said, it’s expected to remain relatively flat between 2020 and 2021. A 9% decrease in consumption is expected from the electric power sector, which makes up the largest percentage of U.S. natural gas demand. In fact, it is the only sector where consumption is expected to decrease in 2021 due to prolonged drops in economic activity.

Have a great weekend!

-Danny Foelber

EKT Interactive Managing Editor

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Energized! #057: “Can Oil and Gas Recover From COVID-19?” Spotlight Issue

May Spotlight Issue:

Can Oil and Gas Recover From COVID-19?

Macroeconomic

Upstream, Midstream, and Downstream Corporations

Airlines

Retail Sales

Natural Gas

Macroeconomic

Data Source: Short-Term Energy Outlook, May 2020, U.S. Energy Information Administration

Upstream, Midstream, and Downstream Corporations

Airlines

Retail Sales

(Yahoo Finance/David Foster)

Natural Gas

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