The Phil Flynn Energy Report
Attacked from All sides
The US energy producers are getting attacked from all sides. Not only is it reeling from direct demand destruction from the growing list of cancellations of events around the world but the all-out price war that has fractured OPEC and Russia and could hit oil-based economies around the globe that are already going to suffer from the fall-out from the coronavirus. Yet somehow, we will get through it.
Stocks had its worse day since the October 1987 stock market crash and maybe it’s worst week in history and for oil, the numbers speak for themselves. Reuters reports that Brent crude is on track for its biggest weekly drop since 1991 and U.S. crude heading for the worst week since 2008 as panic about plunging demand from the coronavirus outbreak grips the market. OPEC revised its oil demand growth, from 980,000 bpd for 2020 last month, to 60,000 bpd.
The historic drop in price is already causing major cap-x cuts across the energy space and is stopping drilling projects right in their tracks. Rig counts will be falling like flies. And while the news is all very bad right now the fallout from the coronavirus. The cutbacks not only could lead to a rash of bankruptcies, but US oil production could also falter and fall as much as 500,00 barrels a day in the coming months.
That may please Russia. Reports say that it was Rosneft CEO Igor Ivanovich Sechin that persuaded President Putin to end the OPEC plus output cuts, arguing it would inflict maximum pain on US shale producers. Of course, it was Saudi Crown Prince Mohammed bib-Salman that went nuclear with an all-out price war and now it's going to come down to who can survive the longest.
The Wall Street Journal reported that “Mr. Putin asked the room whether Russia could withstand a sharp decline in oil prices that was expected if neither side could reach a compromise. Igor Sechin, the head of the state-controlled giant Rosneft and widely considered a staunch nationalist in Mr. Putin’s circle said low crude prices “are great because they will damage U.S. shale,” according to people familiar with the meeting. Days later, Mr. Putin sent his energy minister, Alexander Novak, to the OPEC talks with no mandate to negotiate a production cut with the Saudi-led group, according to oil officials in the cartel. The move, combined with a Saudi insistence on deeper, longer-lasting curbs, led to the collapse of the talks on March 6. Representatives of the Saudi and Russian energy ministries, the Kremlin and Rosneft didn’t respond to requests for comment.”
What is crazy about all of this is the oil market in all of the turmoil seemed to not pay attention to the fact that the U.S. military launched multiple strikes against targets in Iraq. Fox News reported that the US, “using warplanes targeting multiple bases used by Iranian-backed Shia militias believed to be behind the rocket attack on Camp Taji, Iraq, the day before that killed two Americans and one British soldier, a senior U.S. military source told Fox News.
The U.S. military strike was “proportional,” according to the U.S. military source, and hit multiple bases used by the Kata’eb Hezbollah, the Iranian-backed militia that fired 30 Katyusha rockets yesterday at the Taji Base, which housed American and British troops. Of the 12 troops wounded yesterday, five are in serious condition.
A stimulus may hold out some hope. Stocks are trying for a comeback and Goldman Sachs is predicting that the Fed will cut rates by a full basis point at the March 18th meeting. Oil held $30 a barrel and seemed somewhat stable in a world where all was selling. On top of that the Fed adding 1.5 trillion dollars is liquidity should help stave off back fears of low liquidity. The reason the market ignored it was the fact that the headlines of baseball, football, basketball delays or cancellations just kept on coming.
With all of the turmoil its time to pray for all that are impacted by the fallout from this virus. With a lot of faith and with the resilience of the US economy I can assure everyone that we will come out of this even stronger than before. Yet at the same time, I wish I took my wife’s advice and watched the “Walking Dead” so I would know how to survive the Zombie apocalypse.
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