The Phil Flynn Energy Report
Defying The Glut
Oil prices are bouncing back after a pre-American Petroleum Institute (API) report sell-off that was expected to show a massive increase in supply. The API didn’t disappoint by reporting that crude supply surged by 11.9 million barrels. Gasoline stockpiles rose by 9.5 million barrels, while Americans are still stuck at home, and demand has fallen to a 20-year low. Distillate inventories also fell by a less stunning 177,000 barrels. This comes as global oil demand has dropped by as much as 30%, or about 30 million barrels per day (bpd). Yet it seems the market is trying to shrug the API report off as the market has high hopes that we will see historic production cuts that could take as much as 10%-15% of crude supply off the market by OPEC and Russia, even though at this point, it’s not a done deal.
There are some reports that Russia and Saudi Arabia won't go along with a cut unless other countries, like the U.S. and Canada, join into the cuts. The U.S. has countered that domestic market forces have already forced U.S. producers to cut back production.
The EIA lowered its U.S. oil production forecast. The agency's Short-Term Energy Outlook said that "EIA forecasts U.S. crude oil production will average 11.8 million bpd in 2020, down 0.5 million bpd from 2019. In 2021, EIA expects U.S. crude production to decline further by 0.7 million b/d. If realized, the 2020 production decline would mark the first annual decline since 2016." Many in the business think the U.S. production cuts will be even more dramatic than the EIA is predicting.
Lower Spending and Expenses
Yesterday, ExxonMobile announced it would reduce 2020 capital spending by 30% and lower cash operating expenses by 15% in response to low commodity prices resulting from oversupply and a drop in demand due to the coronavirus. Capital investments for 2020 are now expected to be at $23 billion, down from Exxon's prior $33-billion estimate. "The long-term fundamentals that underpin the company's business plans have not changed — population and energy demand will grow, and the economy will rebound," Exxon CEO Darren Woods said in a statement. "Our capital allocation priorities also remain unchanged. Our objective is to continue investing in industry-advantaged projects to create value, preserve cash for the dividend, and make appropriate and prudent use of our balance sheet." Exxon said it continues to monitor market developments and can make additional cutbacks if necessary.
Yet that might not be good enough for Russia. Reports overnight say, "Russia says market-driven oil production declines are not the same as actual production cuts,” according to a Kremlin spokesperson. This is raising concerns that Russia could make the talk of a smooth deal more complicated.
On Friday we get the G-20 emergency meeting of energy ministers. Fatih Birol, head of the IEA, told the Financial Times that the meeting is critical. “With millions of jobs and the stability of the global economy at risk, we have to find a way to protect energy markets during the crisis.” It is so critical that U.S. Energy Secretary Dan Brouillette will join the call while staying in contact with both Saudi Arabia and Russia in an attempt to end the price war and strive to set the stage for the oil market to have a path back to stability. We will need stability because the outlook without a cut is very bleak. The EIA energy outlook report touched on some of the devastation we’ve seen on both the production and demand side.
“EIA forecasts that the United States will return to be a net importer of crude oil and petroleum products in the third quarter of 2020 and remain a net importer in most months through the end of the forecast period. This is a result of higher net imports of crude oil and lower net exports of petroleum products. Net crude oil imports are expected to increase because as U.S. crude oil production declines, there will be fewer barrels available for export. On the petroleum product side, net exports will be lowest in the third quarter of 2020, when U.S. refinery runs are expected to decline significantly.
EIA forecasts significant decreases in U.S. liquid fuels demand during the first half of 2020 as a result of Covid-19 travel restrictions and significant disruptions to business and economic activity. The agency expects that the largest impacts will occur in the second quarter of 2020, before gradually dissipating over the course of the next 18 months. EIA expects U.S. motor gasoline consumption to fall by 1.7 million bpd from the first quarter of 2020 to an average of 7.1 million b/d in the second quarter, before gradually increasing to 8.9 million bpd in the second half of the year. U.S. jet fuel consumption will fall by 0.4 million bpd from the first quarter of 2020 to average 1.2 million bpd in the second quarter. U.S. distillate fuel oil consumption would see a smaller decline, falling by 0.2 million b/d to average 3.8 million bpd over the same period. In 2020, EIA forecasts that U.S. motor gasoline consumption will average 8.4 million bpd, a decrease of 9% compared with 2019, while jet fuel and distillate fuel oil consumption will fall by 10% and 5%, respectively over the same period.
For the summer 2020 driving season, EIA forecasts U.S. regular gasoline retail prices will average $1.58 per gallon (gal), down from an average of $2.72/gal last summer. The lower forecast gasoline prices reflect lower forecast crude oil prices and significantly lower gasoline demand in the second quarter of 2020 driven by Covid-19 travel restrictions and disruptions to domestic economic activity. For all of 2020, EIA expects U.S. regular gasoline retail prices to average $1.86/gal and gasoline retail prices for all grades to average $1.97/gal.
Natural gas has been on a tear as cutbacks in spending take their toll. Bloomberg News reports that, "Two multibillion-dollar natural gas export projects in Africa are facing delays as Exxon and BP grapple with the fallout of the coronavirus pandemic. Exxon has said it will push back the final investment decision for its $30 billion Rovuma liquefied natural gas terminal in Mozambique from this year. BP meanwhile notified ship owner Golar LNG Ltd. that the oil giant won’t be ready to receive a floating gas plant off the coasts of Mauritania and Senegal until about a year later than planned. LNG projects across the globe are at risk as the Covid-19 outbreak delays construction and pummels demand for the heating and power-plant fuel. Even before the pandemic, a flood of gas supply from the U.S. to Australia was overwhelming the market, sending prices sharply lower and threatening the economics of new terminals. Last month, Royal Dutch Shell said it would walk away from an export facility planned for Louisiana.
These delays are “symptoms of a larger trend,” said Jason Feer, global head of business intelligence at Poten & Partners Inc. in Houston. “All projects are facing questions about demand, trying to get work crews, shipyards. It’s just across the supply chain.”
BP had originally planned to take delivery of Golar’s floating LNG plant in 2022 as part of a joint venture project with Kosmos Energy Ltd. Golar shares fell as much as 26% to $4.54, the lowest intraday price since April 2009. BP’s force majeure notice to Golar, “is a direct result of the ongoing business impacts due to Covid-19,” Rita Brown, a spokeswoman for BP, said in an email. While the full impact of the virus on the oil major’s Mauritania and Senegal business “cannot yet be determined,” BP notified Golar “on becoming aware that its obligations were impacted,” she said.
The front end of the curve in oil is still the weakest. That is showing hope for the future and a bullish bias technically. Chart-wise the oil bottom seems to be in and the selloff, a retest. A blow up in the oil talks will make the charts and me a liar. Natural gas if it peaks 200 on a close is a major, surprising upside breakout.
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