The Phil Flynn Energy Report
While the presidential race still has not been decided, the risk of the markets' attitude is apparent. Yet the crude oil market seemed to struggle even as stocks and metals broke out higher on economic optimism and asset price appreciation.
The main reason is still the coronavirus plague that raises a concern for more oil and gas demand destruction. While in the short-term, demand destruction may be on the market’s mind, the real cost to the energy sector will be production destruction. A situation that will have grave consequences on the market when oil and gas demand eventually return.
The latest example is the shutting down of a major refinery. Reuters reported that Royal Dutch Shell RDSa.L said it was closing its refinery in Convent, Louisiana, the largest such U.S. facility and first on the U.S. Gulf Coast to shut down since the coronavirus pandemic devastated worldwide demand. The shutdown will occur this month after Shell failed to find a buyer. The refinery is the ninth in North America targeted for a shutdown or idle since the pandemic, which has dealt a heavy blow to fuel demand globally.
The United States is the world's largest fuel consumer. Shell said it failed to find a buyer for the 211,000 barrel per day (BPD) refinery after announcing plans to sell it in July. "After looking at all aspects of our business, including financial performance, we made the difficult decision to shut down the site," Shell spokesman Curtis Smith said in an emailed statement, according to Reuters.
Yet it is not just refining but production as well. While we know that refining margins have been down substantially since the pandemic started, we have also seen a historic drop in oil rig counts and Cap-X devoted to production. ExxonMobil cut CapX from $33 billion to $23 billion. Chevron left its full-year capital guidance remains at $14 billion but said they would need to see a sustained economic recovery raising it. They cut forward spending expectations to $16 billion from previous guidance of $20 billion. ConocoPhillips cut spending from $5 to $6 billion to just $4.3 billion. EOG cut spending from 6.3 million to about 3.5 billion. Occidental Petroleum cut to $2.4 billion to $2.6 billion from a previous range of $5.2 billion-$5.4 billion. Shell maintained its $20 billion plan, but the cut is guidance by $5 billion. This will equate to millions of barrels of future products that will not be produced. Also, jobs that will not be created.
Job losses in the energy space have been racking up. Tsvetana Paraskova of Oilprice reported the U.S. oilfield services sector lost 106,218 jobs, according to the Petroleum Equipment & Services Association (PESA). Texas has been hit the hardest, with nearly 60,000 jobs lost. The industry is estimated to have added 1,400 jobs in September, but compared to September 2019, oilfield services employment is down by 15.7 percent, PESA said last month. ExxonMobil cut around 14,000 job cuts, or 15 percent of its workforce, including some 1,900 jobs in the United States. According to Deloitte's report, seventy percent of the more than 100,000 jobs lost in the U.S. oil, gas, and chemical industries may not return by the end of 2021.
This is a long term bullish situation for oil and gas. If we ever get through the pandemic, increasing demand will start an upward spike in prices.
So much for the first natural gas draw of the season. The EIA reported that storage fell by a more than expected 36 Bcf, but warm weather overcame the very bullish week over week draw. It had better stay warm for natural gas bears because weeks of smaller than expected supply show the situation's vulnerability, assuming winter ever arrives.
According to EIA estimates, the EIA report showed that working gas in storage was 3,919 Bcf as of Friday, October 30, 2020. This represents a net decrease of 36 Bcf from the previous week. Stocks were 200 Bcf higher than last year at this time and 201 Bcf above the five-year average of 3,718 Bcf. At 3,919 Bcf, the total working gas is within the five-year historical range.
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