Only Thing Keeping Oil and Gas From Crumbling Is Global Economic Stimulus

April 1, 2020 10:43 AM
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Global markets are taking another plunge after President Trump offered a sobering assessment of the rising death toll expectations from the coronavirus. Fox News reported that, "President Trump told Americans to brace for "a very painful two weeks" and warned of thousands of more virus-related deaths. "The surge is coming, and it's coming pretty strong," the President said in the White House briefing room. The White House extended social distancing guidelines.


Keeping the economy closed, and most Americans in their homes: the coronavirus could still leave 100,000 to 240,000 people in the United States dead and millions infected. Without any measures in place to mitigate the contagion's spread, those projections jump to between 1.5 and 2.2 million deaths from COVID-19. The extension of social distancing guidelines and the sober assessment is taking a significant hit on the energy sector, as I have said before, energy is ground zero when it comes to the economic fallout from this virus. The impact on demand destruction is real, historic and growing. Reuters reported that crude and oil product storage tanks In UAE's Fujairah had reached full capacity.


The only thing keeping oil and gas from totally crumbling is global economic stimulus, and the expectations that cutbacks in spending and production could reverse the coming massive oil glut when the global economy starts to get back to normal. That hit home after the American Petroleum Institute reported, U.S. crude supply increased by 10.485million barrels Gasoline supplies surged as cars were parked by 6.085 million barrels. Still, distillates fell by 4.458 million barrels.


While demand destruction is real, we will also see future production destruction as oil and gas may see a record cutback in capital spending. Already Reuters is reporting that, "Global spending on oilfield equipment and services this year will 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, as oil and gas producers slash spending."


The Financial Post reported that "B.P. cut its 2020 spending plan by 20% and will reduce output from its U.S. shale oil and gas business in the face of the collapse in oil prices triggered by the coronavirus outbreak, it said on Wednesday. "This may be the most brutal environment for oil and gas businesses in decades," CEO Bernard Looney said in a statement.


The London-based company said it plans to spend $12 billion this year, down from $15 billion, joining its peers that have announced cuts of around 20% in annual spending on average. That will include a $1.0 billion reduction in investment in its shale business, known as BPX, where production can be switched on and off relatively quickly, representing a 50% drop from 2019 investment levels. BP became a leading shale producer following the $10.5 billion acquisition of BHP's onshore U.S. assets in late 2018.


Yet when it comes to OPEC and the Russia and Saudi Arabia price war, it seems that the race to zero profits is on. There is no thaw in the Russia Saudi price war, and other OPEC producers are joining the price suicide mission by raising oil output as the OPEC PLUS deal expired. Reports show Saudi oil production has gone over 12 million barrels a day. U.S. crude oil production is going in the other direction falling by 60,000 bpd in Jan. to 12.744 million bpd vs. revised 12.804 Mln bpd in December. Russia said it's not planning to increase crude production -- even though the OPEC+ production curbs deal has now expired -- given the massive oversupply in the global market, according to Bloomberg.


Yet there are reports that the idea of a U.S.-Saudi alliance has been put on the back-burner. Probably because President Trump still has mixed feelings about crashing oil prices. Or maybe it is because of U.S. anti-trust laws. Regardless, no U.S.-Saudi OPEC deal. That leaves the U.S. to deal with Russia. While Russia is helping the U.S. by sending a Russian plane with medical equipment to fight the coronavirus, its help on the energy market is less clear. 


Tass reports, "Russian Energy Minister Alexander Novak has held telephone talks with U.S. Secretary of Energy Dan Brouillette. The sides discussed the current state of the global oil market and the promising areas of cooperation, agreed to continue the dialogue. They noted the necessity to respond to existing challenges in the worldwide energy sector, such as the falling demand and oil supply glut, Russia's Energy Ministry said in a statement on Wednesday. "Ministers noted that the falling demand and supply glut on the oil market does not facilitate the development of global energy and create risks for the stable supply of the market after the start of the global economic recovery. Moreover, heads of energy departments noted the necessity to provide a constructive response to existing challenges and further continuation of the dialogue," the statement runs.


Yet despite all of the doom and gloom more talk of stimulus from China and a prediction by the Feds James Bullard that the fourth quarter for the U.S. economy will be a boom is slowing the oil market decent. While most are predicting a crash to 10 dollars a barrel in oil, so far, they are having a hard time staying below twenty. Lower prices make for more significant percentage moves. The oil market, in the back end of the curve, is still holding out hope for a demand boom later in the year. As for trading, it is in a downtrend, but you can also short term day trade.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.