The Phil Flynn Energy Report
Fear and Reality
Global oil markets are still struggling to find the thin line between horror and reality. Global markets plunged off worries that the coronavirus could turn into a worldwide pandemic creating a panic selloff that defied current realities. No matter how bad the coronavirus turns out to be, almost assuredly we know that fear will, at specific points, exceed what is real.
Global oil markets are trying to shake off the worst-case coronavirus fears, again. In the overnight session, markets started strong with help from President Donald Trump’s tweet that suggested that stock traders might be overreacting. The tweet read "Coronavirus is very much under control in the USA. We are in contact with everyone and all the relevant countries. CDC & World Health have been working hard and very smart. Stock Market starting to look very good to me!"
Stocks, in many cases, are looking good to me as well. The S&P bounced off significant support, and let's face it, when you get a fear-driven selloff many stocks that will have seen a limited impact from the coronavirus get sold along with everything else. Even companies that will see an effect will see a rebound if and when the virus gets under control. While some fear that may not happen, and it may not, history teaches us a different story. Every significant demand destruction, even of the last 25 years and probably longer, has been a buying opportunity, not a selling opportunity.
The same is valid for oil. Oil markets are trying to rebound as well after the shellacking it took yesterday. It sold off on reports that Russia still can't make its mind up in joining OPEC. Yet the Secretary-General of OPEC Mohammed Sanusi Barkindo made an excellent point about said production cut, sounding philosophical when he said that when the near-term outlook is murky, go back and focus on the big picture. He said that "We see the global economy almost doubling by 2040 and that the world's "thirst for energy will continue to grow," despite the coronavirus.
Still, the International Energy Agency (IEA) is warning that they may have to lower their demand forecast because of the Virus. Rystad Energy also revised its global oil demand growth forecast down by 25 percent to 820,000 b/d in 2020. Their previous growth forecast stood at 1.1 million b/d. The company says coronavirus's impact on demand growth could be even worse, however, slashing growth to as low as 650,000 Mb/d.
Still in the big picture, while we see demand destruction, we also see delayed demand. On the backend, we should get a demand boost, and that is OPEC's more significant point.
If you can’t beat the frackers, join them. Saudi Ariba gets it. They realize that natural gas is the most useful power source for the next 50 years. Instead of trying to knock frackers out of business, they are now using fracking to become an even more significant producer of natural gas. Reuters reports that "Saudi Aramco is launching the most significant shale gas development outside of the United States to boost domestic gas supply and end the burning of oil at its power generation plants,” Chief Executive Officer Amin Nasser told Reuters on Monday.
If Aramco hits its targets for the development of the field, Saudi Arabia will become the world's third-largest gas producer by 2030. The world's top two gas producers are currently the United States and Russia.
Nasser said Aramco had developed fracking using seawater, which will remove the obstacle that a lack of water supply represents to fracking in the desert. "A new shale revolution is taking place (in Saudi Arabia), it's commercial, and we are using seawater," in the fracking process, Nasser said in an interview in Saudi Arabia's oil-producing Eastern Province. "A lot of people said it doesn't work outside the U.S.... because fracking uses a lot of water and we are not rich with water. But we are using seawater." Reuters says that “Aramco has drilled 150 wells since 2013 in the Jafurah shale gas field to prepare the development plan,” he said.
The Saudi state oil group has worked with international oil service companies such as U.S.-based Schlumberger (SLB.N), Halliburton Co. (HAL.N) and Baker Hughes Co. (BKR.N) on the field and to develop the technology to fracture the rock and release the oil and gas it holds, a technique known as fracking. Those firms are active in U.S. shale fields.
In the meantime, we are still losing 1 million barrels a day of Libyan exports, in case anyone was wondering.
Natural gas is weak, and the U.S. is on track for record supply. The Energy Information Administration says that "reports that the U.S. will see record supply of natural gas in storage later this year. The EIA says that "In the U.S. Energy Information Administration's (EIA) February Short-Term Energy Outlook (STEO), EIA forecasts that the Lower 48 states' working natural gas in storage will end the 2019–20 winter heating season (November 1–March 31) at 1,935 billion cubic feet (Bcf), with 12% more inventory than the previous five-year average. This increase is the result of mild winter temperatures and continuing healthy production. EIA forecasts that net injections during the refill season (April 1–October 31) will bring the total working gas in storage to 4,029 Bcf, which, if realized, would be the most substantial monthly inventory level on record.”
Mild winter temperatures for the current winter have put downward pressure on natural gas prices and led to smaller withdrawals from natural gas into storage. Year-over-year growth in dry natural gas production and natural gas exports—especially liquefied natural gas (LNG)—throughout 2019 also affected natural gas storage levels. On October 11, 2019, the total natural gas in storage surpassed the previous five-year average—an indicator of normal storage levels—for the first time since mid-2017.
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