Energized! #060

Friday, June 5th, 2020

Hello all,

Happy Friday and 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 this week’s issue.

Energized! 

Curated weekly oil and gas newsletter

Oil and Gas Prices and Markets

Light, sweet crude (dollars per barrel): $37.41

Last week: $33.25

Natural Gas (dollars per million British thermal units): $1.821

Last week: $1.731

Rig count (United States): 301

Last week: 318

+ Forecasting is Easy – Spears Insider

The Spears brothers point out some good and bad ways of forecasting, noting the strong correlation between WTI price vs. U.S. land oilfield spending.

They attribute this strong trend to the fact that most oil and gas in the U.S. is privately owned, not state-owned. “Here is a massive service and equipment infrastructure that allows activity in the field to be very reactive to commodity price.”

“Everywhere else there is a “rent” negotiated between the oil company and the host government that owns the hydrocarbon resource base and it is this rent rate that often outweighs the impact of the daily price of oil.”

The result: “In 2020 and 2021, activity in the US and companies focused on the US will suffer terribly. Meanwhile, companies primarily working elsewhere in the world will do okay – not great, but okay.”

Upstream

+ Trump giveth and taketh away – The Houston Chronicle

“Oil companies see royalty payments cut, but wind, solar must pay back rent.”

President Trump has given a reprieve to oil companies in the form of reducing royalties by as much as 80%. According to the Chronicle, oil and gas royalties amounted to $3 billion in 2019.

The main argument against this move, as cited in the article, is that it incentivizes oil production during a time when the market needs less production.

On the flip side, the Bureau of Land Management is concurrently “sending out bills for retroactive rent payments to wind and solar companies.”

The topic is controversial and worth a read if you’re interested in the government’s role in energy policy during this pandemic.

Cars and Gasoline Demand

+ Cars making a comeback, stimulating oil recovery – Rigzone

Although no one likes sitting in traffic, cars have become the preferred public transportation alternative to buses and trains. In fact, some companies are making it borderline mandatory.

The results out of subway-dependent cities in China suggest that usage is down substantially, over 50% for Beijing’s metro, for example.

Public transportation in Berlin is down 61% whereas transportation by car is down just 28%.

“In the U.S., gasoline consumption is clawing back from record lows, rising by 400,000 barrels a day during the week ended May 1. Cities in Florida, one of the first American states to re-open, has seen fuel sales rebound to 30% below normal levels, from 50% weeks ago, according to the Florida Petroleum Marketers Association.”

This summer may see its fair share of road trips instead of air travel as well.

“In the U.S., demand for long-haul recreational vehicles has picked up as people opt for road trips over air travel.”

+ Electric-car sales sag in China – The Wall Street Journal

As travel by car instead of public transportation in China picks up, customers are gravitating towards gasoline cars over electric vehicles (EVs).

“April was the first month in which Chinese EV sales declined while the overall auto market grew. Gasoline-car sales in April rose 6% from a year earlier, snapping a 21-month streak of declines, but EVs were down 27% — a sharp reversal for a segment that had outperformed the overall market until this year.”

“The government had set a sales goal of two million electric vehicles this year, but analysts expect only around 1.1 million vehicles to find buyers, down about 10% from last year.”

“General Motors Co., Toyota Motor Corp. and Volkswagen AG are among those that have outlined aggressive plans to roll out dozens of electric models this year and beyond in the Chinese market.”

The article has a great deal of info regarding China’s EV subsidies, its goals to reduce pollution in cities while also helping car manufactures during this difficult time, and more.

Natural Gas

+ Gas industry group sees good time for fuel switch – Rigzone

“Given the current “unprecedented era of low LNG prices,” IGU contends now may be a particularly good time for market participants to make the switch from more polluting fuels to natural gas.”

A great pro-natural gas article that cites the tailwinds surrounding the push for the continued switch to natural gas from more environmentally harmful fossil fuels.

Note that, “in the power sector, gas produces less than 10 percent of the particulates and 50 percent of the greenhouse gas emissions as coal.”

As we’ve mentioned in previous issues of Energized, the natural gas industry, particularly LNG, is being hit hard by the pandemic with several planned and proposed projects being delayed and investments drying up.

However, the article notes the tailwinds that LNG was experiencing going into the Pandemic, such as the fact that “the global LNG trade reached 354.7 million tonnes (MT) in 2019 – a 13-percent increase from the previous year and the sixth consecutive annual increase.”

For more information on natural gas, check out our courses on the midstream sector of oil and gas.

Power Generation

+ Offshore wind finding direction in U.S. – Power Magazine

This article is just as much about technology as it is about power generation. Offshore wind is an important topic for leveraging the production platform design and development capabilities of oil and gas.

“Offshore wind installations already are delivering on their promise as a transformative technology for power generation, with projects off European coasts providing proving grounds for the industry. U.S. adoption of offshore wind has been slower, owing in part to regulatory issues and political will.”

“The first commercial offshore wind farm in the U.S.–the 30-MW Block Island installation off the Rhode Island coast (Figure 1)—began operation in late 2016, and as of April 2020 is still the nation’s only operating project.”

The article contrasts several U.S.-specific headwinds for the offshore wind industry, like regulatory challenges and a need for more cost-efficient technology, with the proven success of offshore wind in other parts of the world. A great read for those interested in the offshore wind industry from a business, political, environmental, and technological perspective.

OPEC

+ OPEC and the Road Ahead – New York Energy Forum Event, Hosted By The Consulate General of Canada in New York.

Our takeaways from the event are as follows:

• Canada has come out with support measures for western Canadian provinces that are struggling with the downturn in oil and gas.
• Programs amount to $1.7 billion in relief to Alberta, Saskatchewan, and British Columbia, which help jobs.
• Canada is still committed to infrastructure like pipelines and plants it shares with America. It is wholeheartedly joined on a unified front for North American Energy.

Jan Stuart

• Liquidity is low and 40 million people in the U.S. don’t have jobs.
• We won’t see record gas or oil demand for some time.
• We are in an enormously deep hole from a demand perspective.
  • Oil demand is averaging 85 million bpd in Q2.
  • Expect 8 million bpd short of 2019 levels, and next year 2 million bpd short of 2019, especially short on jet fuel and gasoline.
• Nationalistic self-interest will outweigh collective solutions.
• The fourth quarter could still be down 4 million bpd from Q4 2019.
• Painfully slow and patchy recovery from a demand side.
• On the supply side, we have a huge matrix. Folks without a market shouldn’t produce.
• Involuntarily shut-ins began materializing in March and accelerated into April and May.
• The OPEC countries will take national interests at heart, OPEC cohesion is not great.
• We don’t know the details of the virtual deals that are being made behind the scenes with OPEC.
• OPEC’s Phase 1 promise (the two months of supply reduction) will be honored, the third quarter will be okay, but then by the fourth quarter maybe there will be a supply increase.

Edward Morse

• Pain felt by producers from the unexpected collapse in demand is something that is on everyone’s mind.
• The ability for Saudi Arabia and OPEC to increase supply is a scare for other producers, the fact they can open the valve and just drop prices again is a deterrent from ramping production anytime soon without substantial improvements to deals or prices.
• A lot of unknowns in the oil market today have China written all over them because China wasn’t as much a part of the talks over the past two months.
• Many analysts feel there is froth in the price of oil, with Brent close to $40 again this morning. Some of this is from machine trading, assumptions that markets will get tighter, etc.
• The demand forecast is hard to predict.
• Consumer spending, unemployment, and other indicators that are still not up.
• Is China demand real, is it really something you can count on?
• Can you count on supply not increasing if prices go up?
• In Russia, companies don’t have access to capital markets, spending isn’t there, need government assistance.
• We don’t have U.S. or Canadian data to know what exactly is shut-in, but it is coming back. If we don’t have prices go down from here, we might see half of shut-ins come back in June, a quarter more back in July.
• Oil demand comes back to 2019 levels in Q3 2021, but that’s two years of lower demand growth, which will have a huge long-term effect on oil and gas despite the short-term alleviation.
• Aviation fuel demand will be in trouble for a long time, partially because of changes in business and luxury travel which will likely have a permanent decrease.
• Another headwind for jet fuel is the fact that airlines are getting more efficient engines and switching to alternative fuel and biofuels.
• Jet fuel demand is unlikely to come back till at least 2023.

Q&A

• The top producers, Saudi Arabia, Russia, and the U.S., are such fundamentally different countries it makes it hard to draw alliances or come to any accord.
• In a Biden presidency, the U.S. comes closer to Europe in wanting nothing to do with oil.
• Both Russia and U.S. corporate interests are not aligned with government policy.
• OPEC fails when the chips are down, has moments when it rises to the occasion.
• The U.S. has a poor history of regulating international prices.
• The energy in transition will elicit more funding, and therefore more momentum, given the turbulence in this oil and gas market.
• Generally, both Jan and Ed believe that $40 Brent is surprising, that we have gotten there as quickly as we have given the economy has just started opening and nothing has really materially improved, only talks of improvement and forecasts for improvement.

+ Worst may be over for biggest Arab economies as businesses adapt – Houston Chronicle

“Following a pandemic-driven plunge, non-oil private sector activity improved in Saudi Arabia, Egypt, and the United Arab Emirates”

Despite the headline, the article gives a pretty bleak update on the state of affairs in the Arab world. Egypt, UAE, and Saudi Arabia could experience the worst recession on record this year.

“While Saudi Arabia moved this week to pump extra liquidity into banks, fiscal constraints after the crash in crude prices will likely hold back stimulus.”

Employment is also a major concern, along with salary cuts that are already taking form.

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Have a great weekend!

-Danny Foelber

EKT Interactive Managing Editor