The Phil Flynn Energy Report
Unlocking The Potential
The crude oil market is having its best month percentage wise in history as we start to unlock the global economy. Oil demand is coming back faster than expected, and the IEA is saying it believes that global oil demand will be higher than it was before the coronavirus shutdown happened. Reuters is reporting that the Russian energy minister, Alexander Novak, is predicting that the global oil market will be in balance in the next 2 months. Early reports show strong Russian compliance to cuts come as OPEC implements the biggest global production cut ever.
U.S. energy producers continue to cut back, and there are expectations of a wave of shale bankruptcies. Last Friday’s Baker Hughes weekly rig report showed that the number of active U.S. rigs drilling for oil dropped by 21 to 237. The oil-rig count has now fallen for 10 weeks in a row, implying future declines in domestic crude output. The total active U.S. rig count, meanwhile, also fell by 21 to 318, according to Baker Hughes. The Financial Times reports that, “The most prominent independent shale oil groups in the U.S. said a record combined loss of $26 billion in the first quarter as the sector braces itself for a wave of bankruptcies over the next 2 years. The collapse in crude demand brought about by the coronavirus pandemic forced more than $38 billion in write-offs among top producers, according to an analysis by Rystad Energy, sending net losses tumbling well below an average of $2.9 billion in the past 6 years.”
The Financial Times writes that, “Analysts predict 250 companies could go bust before the end of next year unless oil prices rise fast enough to start generating cash for producers wilting under punishing debt loads …. Already 17 smaller U.S. oil and gas producers, with total debt of around $14 billion, have filed Chapter 11 bankruptcy this year, according to data from Haynes & Boone. Analysts at Rystad estimate the total could rise to 73 before the year is out. Another 170 will follow next year if prices remain around current levels.”
First, we had peak oil, then we had peak demand, but maybe we don’t have peak anything. Bloomberg reports that Fatih Birol, the head of the IEA, has thrown cold water on hopes the Covid-19 will cap demand and reduce climate-changing emissions. “In the absence of strong government policies, sustained economic recovery and low oil prices are likely to take global oil demand back to where it was, and beyond,” Birol said in an interview. Bloomberg reports that “the world consumed last year nearly 100 million barrels a day of oil, and some in the energy industry believe that could mark the peak for global demand. They hypothesize that the coronavirus outbreak will trigger changes, like widespread working-from-home and less overseas travel, reducing consumption permanently.
I doubt this. I agree that oil demand is on track to exceed pre-coronavirus levels and that the theory of peak oil demand is as flawed as the peak oil craze was 20 years ago. Oil prices have come a long way since subzero pricing. What we’re witnessing is one of the quickest global oil supply and demand rebalancing ever. While we may see some weaknesses, the trend is higher, and the market is looking ahead where surging demand and plunging production could create a buying squeeze.
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