Oil Production Second Thoughts

October 9, 2020 07:47 AM
Hurricane Delta will soon make landfall
Most Gulf of Mexico production is shut down
Peak oil and peak demand
Energy Report

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The Phil Flynn Energy Report 

Delta dawn

Hurricane Delta is going to make landfall in just hours. At this point, it’s unclear as to whether the storm will hit as a category 1 or a category 3 storm. Regardless, Delta has already played a part in increasing oil prices and depending on how hard the storm hits, could impact some of same refineries that were damaged by Hurricane Laura. The storm could also create demand destruction. The weaker the storm the less of a chance of prolonged demand destruction. The stronger the storm the more worries about refinery damage and a potential drop in refinery crude demand but at the same time a potential squeeze on gasoline that is already seeing a tightened market on increasing demand.

Right now, oil production shut in the Gulf of Mexico is at 91%, just under 2 million barrels a day (bpd) Natural gas production is 61% shut in. Let us pray for minimal damage and for no loss of life.

Oil prices are also getting support because Saudi Arabia and Russia may be having second thoughts about raising oil output again next year. The Wall Street Journal reported that, “Saudi Arabia is considering canceling OPEC plans for an oil output hike early next year, senior Saudi oil advisers said, as Covid-19 cases in many parts of the world rise and the expected return of Libyan crude threatens to swell global supplies.”

In April, the 13-member, Saudi-led OPEC and 10 Russia-led producers agreed to carry out record production cuts of 9.7 million barrels a day (bpd), as the initial flare-up of the new coronavirus shuttered economies around the world, grounding flights and public transportation and closing offices and factories. The accord called for producers to return that production gradually, in stages of 2 million bpd of added, every 6 months, assuming the worst of the pandemic would fade before the end of this year. In the summer, the group moved ahead with the first hike in output. The next extra 2 million bpd were expected to start flowing in January according to the Wall Street Journal. Oil advisers in Saudi Arabia now say Riyadh is considering postponing the move until the end of the first quarter.

First, we had “peak oil” and now we get “peak demand.” OPEC says they expect demand in most developed countries to fall by about 27% over next 25 years. An interesting read with some valid points but their long-term peak demand theory is probably greatly exaggerated. Predications of "peak demand” has the same flaws that peak oil production had. Part of the report is being influenced by the shock in demand drop after coronavirus. They are predicting our consumption patterns will change forever. Maybe not. Market forces will drive the energy mix. While the world is making major shifts to alternative fuels, it’s unlikely that the report is considering all sides of the equation of alternatives. It doesn’t cover the manufacturing and disposal, footprint of alternatives like wind and solar. It fails to account for the environmental impact of electric cars and whether they will be scalable on a global market. Billions of electric batteries and solar panels and wind turbines that have to be produced and eventually disposed of.

There is also a long way to go to close the reliability gap with many alternatives. Take a look at California. Even so-called clean hydrogen fuel is not that clean. Researchers at Rystad Energy says that making the hydrogen gas currently generates more carbon emissions globally than the airline industry did at its peak.  

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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.