Gulf Coast Braces For Yet Another Storm

October 26, 2020 09:25 AM
Tropical Storm Zeta is following the same paths as Laura and Delta
Saudi oil demand is recovering
Exploration and discovery bankruptcy debt is rising
Energy Report

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The Phil Flynn Energy Report 

Oh, No, Zeta!

Ok, I think it is fair if we all say enough is enough. Yet again, another potential hurricane is on track to take another direct hit on U.S. refinery row. Tropical Storm Zeta is setting its sites on the same path as Hurricane Laura and Delta, assuring more confusion and potential damage to the U.S. Energy Industry. 

More robust demand in India may give us some support. Reuters reported that "Crude oil processed by Indian refiners hit the highest in six months in September, in another sign that demand for fuel is recovering from the blow to economic activity and transportation from coronavirus restrictions.” 

In September, crude oil throughput rose 13.4% from the previous month to 4.33 million barrels per day (17.71 million tonnes). This was the highest since the onset of the country's coronavirus restrictions in March when refiners processed 5.01 million BPD of crude oil. Fuel demand also rose for the first time since June last month; data showed earlier. Since March, gasoline sales rose for the first time, preliminary data showed, signaling a pick-up in industrial activity ahead of critical festivals.

Saud Arabia's Energy Minister Khalid al-Falih says a recovery in oil demand has happened over the past few months. Still, OPEC Plus has to deal with the return of Libya oil. The Libyan National Oil Company announced that all major oil ports are open and that production is likely to increase to 1.0 MM BPD over the next four weeks. OPEC Plus is sending signals that they will adjust their output to accommodate them if need be. Still, the market is taking it as a negative.

Yet, if demand continues to rise, it is clear that supplies will tighten. Even if we don't, the hit to global investment in oil and bankruptcies signals a much tighter market in the future.

Rystad Energy reported that "The associated debt from North American oil and gas bankruptcies in 2020 has already reached an all-time high and is set to grow even further this year as the wave of chapter 11 filings continues." The combined count of chapter 11 filings from exploration and production firms (E&Ps) and oilfield service (OFS) companies this year in North America has so far reached 84. While lower than the historical high of 142 in 2016, the associated debt these companies are carrying is much higher, at $89 billion so far, some $19 billion more than in 2016. Under the current price environment, Rystad Energy projects that more bankruptcies will follow this year, adding to the cumulative associated debt and boosting it to a staggering figure of over $100 billion. 

Assuming a WTI average of around $40.00 per barrel this year and a Henry Hub price of $3 per MMcf, we forecast North American E&P bankruptcies to rise to 55 by the end of the year, from 40 filings at the time of writing, adding about $15 billion of debt to the cumulative total. And that excludes possible associated debt additions from new OFS company bankruptcies, which currently stand at 44 cases. Under this scenario, associated debt for these 55 E&P Chapter 11 filings this year is projected to reach $69 billion. Should these price levels persist in 2021, Rystad Energy expects 54 new E&P bankruptcies for the year, carrying an associated debt of about $44 billion. In a more pessimistic scenario that assumes a Henry Hub price of $2.5 per MMcf, E&P bankruptcies could climb to 61 cases this year and to 68 in 2021.

A fire and explosion hit the General Hazi Aslanov oil tanker in Azov's Sea on October 24, Russian federal agencies reported.

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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.