Oil price discussion and analysis

This analysis opens up the discussion on whether the oil industry can survive the rupture caused by CORVID 19.

Will the coronavirus kill the oil industry and help save the climate?
Analysts say the coronavirus and a savage price war means the oil and gas sector will never be the same again

Damian Carrington, Jillian Ambrose and Matthew Taylor
Analysts say the coronavirus and a savage price war means the oil and gas sector will never be the same again
The plunging demand for oil wrought by the coronavirus pandemic combined with a savage price war has left the fossil fuel industry broken and in survival mode, according to analysts. It faces the gravest challenge in its 100-year history, they say, one that will permanently alter the industry. With some calling the scene a “hellscape”, the least lurid description is “unprecedented”.
A key question is whether this will permanently alter the course of the climate crisis. Many experts think it might well do so, pulling forward the date at which demand for oil and gas peaks, never to recover, and allowing the atmosphere to gradually heal.

The boldest say peak fossil fuel demand may have been dragged into the here and now, and that 2019 will go down in history as the peak year for carbon emissions. But some take an opposing view: the fossil fuel industry will bounce back as it always has, and bargain basement oil prices will slow the much-needed transition to green energy.
https://www.theguardian.com/environ...s-broken-will-a-cleaner-climate-be-the-result

jbocker said:

I wonder what the impacts on companies in the alternative energy supply/development will be, as oil becomes cheap for any extended period of time.

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As a broad statement there's uncertainty in the industry same as there is with pretty much everything else.

In the context of an oil price crash, given that such a thing has actually occurred, I'll broaden the definition of alternative energy from it's recent (2019) meaning of wind, solar etc back to it's 1970's meaning of "anything that isn't oil".

So to clarify, coal, gas and nuclear are "alternative energy" using that old definition. Alternative in that they're an alternative to oil.

In that context I'll point out that on a purely financial basis the alternatives, all of them, are going to struggle at the margin in this low oil price environment. With oil at $20 per barrel, a problem with natural gas or coal isn't just the cost of the fuel but that of transporting it. If it's already there then it's different but if someone's planning a new gas pipeline or a new rail line to move coal, well bottom line is it's incredibly cheap to ship oil in to any coastal location. The rationale for moving coal or gas over any great distance always did depend on the notion that oil itself, as a commodity, was at least somewhat costly. If it isn't well then that undermines the logic behind building international gas pipelines and so on, it becomes cheaper to just ship in oil to run industry etc.

Looking at the other sort of alternative energy, renewables, well it really depends on what happens with government policy other than for those projects which are stand alone profitable against now considerably cheaper fossil fuels. On that point I doubt you'll find anyone willing to make a serious bet at this stage - if could go either way. We could see governments push climate change right up the list of priorities in the pandemic aftermath or we could see the issue all but forgotten amidst severe recession. I won't speculate beyond saying that taking a neutral perspective, some pretty decent arguments can be made for either case at this stage.

ducati916 said:

Shut-ins almost here.

Pipeline companies tell drillers to cut. Texas pipeline companies have told shale drillers to cut upstream production because pipelines and downstream storage and refineries are reaching capacity. The move is a sign that shut ins are just around the corner.

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A particular issue which may seem counter-intuitive is that the drop in oil consumption is stretching the limits of infrastructure capacity.

Using round numbers to make the point simply, suppose that country x produces 10 million barrels per day and consumes 9 million barrels. So a net export of 1 million barrels per day.

Now why would that country have export infrastructure able to cope with 4 million barrels per day of exports? In short they don't and that creates an issue that whilst they might be able to double exports to say 2 million bpd, ultimately if demand drops by a third then there's nowhere for some of that domestic crude oil production to go. Once the storage is full, the forced situation becomes a production cut or a drop in the domestic price below international pricing and using the oil to fire boilers and furnaces in place of coal or gas. There isn't the physical ability to export in the required volume even if doing so were profitable.

The US would seem to be at that point already, an interesting point in itself since it suggests that US domestic oil consumption must be down quite a lot for this to have occurred so quickly.

The US has massive oil infrastructure, far more than any other country, but ultimately it's substantially geared to extract oil from the ground and move it around the US with a network of pipelines crossing the country. The ability to export the stuff isn't overly great and there are also localised issues where the only outlet for oil from a particular field is that it's hauled (by road tankers) to the refinery 50km away. Etc.

If that refinery can't use it, and they won't if there isn't reasonably local demand for their output, then there's no outlet for that crude oil other than to truck it somewhere else in the US and when you're hauling 150 barrels at a time in a tanker truck, there's a limit to how far you can drive that truck before the whole idea becomes uneconomic to the point that the oil ends up literally worthless. Every extra mile further devalues the oil itself as the transport costs mount up.

Point there being that it's not just WTI traded on an exchange, at a local or regional level oil can have quite a different price.

Looking at a local level within the US, here's some pricing which illustrates that. All prices are in USD per barrel and all this is crude oil.

WTI spot price "on paper" = $21.90
WTI physically at Cushing, Oklahoma = $14.10 (30 March)

Buena Vista (California) = $25.96
Midway-Sunset (California) = $21.28
North Louisiana Sweet = $13.75
Michigan Sweet = $13.50
Michigan Sour = $8.75
Arkansas Extra Heavy = $8.75
NW Kansas Sweet = $8.25
Central Montana = $7.99
Colorado South East = $7.25
Oklahoma Sour = $4.75
Upper Texas Gulf Coast = $4.56
Williston Sour (North Dakota) = $1.39

So lower quality oil in the wrong place already is basically worthless. The abundance of supply means nobody actually needs it in a physical sense so it has to be dirt cheap to be worth anyone buying it given transport and refining costs (which will be higher for sour oil).

Internationally it's much the same. Heavy sour oil in the wrong place is down close to $10 whilst light sweet in the right place, where someone can actually use it, is close to $30. So we're seeing quite a lot of oil the value of which is reduced by the collapse of local demand and the inability to physically move it somewhere else either at all or at least without incurring high costs (road tankers etc).

Price data sourced from the Energy Information Administration (US Government) and the site oilprice.com

While I'm cheering for a higher POO there's no demand to sustain any meaningful rally. The US is shutting down with no airlines, no driving. Yet their oil production hasn't slowed. The numbers quoted by the commentators indicate that soon they'll have so much oil and nowhere to store it. Shut downs are inevitable and there's going to be some consolidations between companies to survive.

peter2 said:

soon they'll have so much oil and nowhere to store it.

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A point often overlooked with commodities is that with oil there's a hard, physical limit to how much can be stored given that it's a liquid. You need a tank or other container to put it in.

In contrast the ability to stockpile coal or iron ore is for practical purposes unlimited given that it can be simply piled up out in the open on any reasonably flat land.

If nobody wants to blink in this production war then oil's going to get interesting.....

Our oilers should take a brief ride higher today after an overnight bounce in WTI:

Support at $20 has only once been meaningfully breached, yet many times challenged.
We are very much in the early days of oil's market glut and I am not as optimistic about the overnight bounce as the move higher would suggest.
Detailed report on COVID-19 effects is here.

Apparently some service centres in Sydney were selling ULP for 47c a litre this morning.

SirRumpole said:

Apparently some service centres in Sydney were selling ULP for 47c a litre this morning.

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That price doubles if you step outside the car

SirRumpole said:

Apparently some service centres in Sydney were selling ULP for 47c a litre this morning.

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Typical. Just when car and driver is in lock down.

Smurf1976 said:

A point often overlooked with commodities is that with oil there's a hard, physical limit to how much can be stored given that it's a liquid. You need a tank or other container to put it in.

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There could be 2 issues in the gas industry as well. Assuming the downturn in industrial use, the first is the capacity to store gas similarly to oil. It has been quite a few years since I had an involvement in the development years of the CSG industry but the second is that it was the case in the early days that gas contracts escalation clauses were tied to the price of oil. If that is still the case then some of our gas producers could have an issue.

ducati916 said:

From an Grant's:

Rozencwajg says that in contrast to the 2014 to 2016 period, the corporate response has been swift and severe:

You’ve got cash flows across the industry collapsing by more than 50%, budgets have been slashed, and there is no ability to tap capital markets. They’ve got to cut the rigs. Companies are going back and cutting capex a second time. Diamondback Energy did it today. Budgets are down 50% to 70%. At that level you’re going to see massive declines. The shale era is over. It probably peaked in the fourth quarter and is set to begin a long terminal decline.

While COVID-19 is current, there will be a demand contraction. That will return once this virus issue is in the rearview mirror and pretty quickly.

The supply contraction has lagged the demand contraction. But it has been hastened and deepened by the Saudi price war. As a a result of that price war the supply contraction has been vastly accelerated. Bye and large, that supply contraction is not going to return quickly, if ever.

Similarly, the supply boost from the current price war may be less severe than believed, as Goehring explains:

The impact of $20 oil is so extreme that Saudi must be thinking twice about what they did. In waging the 2014 to 2016 price war, crown prince Mohammed Bin Salman contradicted his advisors and it led to a 33% decline in FX reserves. This version will further strain internal government finances and risk emboldening political opposition. Interestingly, MBS had four senior officials arrested the day before commencing the price war.

A deal will be eventually announced. The market believes that Saudi Arabia can increase production to 12 mbpd from 9.6, we don’t think they can get above 10.5 mbpd on a sustained basis. Remember that processing facilities equivalent to 500,000 bpd are still offline due to the drone attack last fall.

How much more oil can they really put into the market? It may not be that much.

The Arabs have probably achieved already what they set out to accomplish, vis-a-vis a reduction in total supply and will look for a way to exit gracefully now, rather than run the risk of self-inflicted damage to their own interests.

If this is not the absolute bottom in the oil war, it is close enough. Things will settle out re. the price war and the real acceleration of prices higher will come with the resolution of COVID-19 and a return of demand.

jog on
duc

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Hey @ducati916 is it possible to go back to the standard font size as it's much easier for me to read. I make a point to read your posts more than once..

Skate.

Country Lad said:

There could be 2 issues in the gas industry as well.

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Agreed.

Looking at the Australian east coast market the spot price has dropped although that wasn't purely in response to the oil plunge, it started well before that. Prices are hovering around circa AUD $4.75 / GJ at the moment versus $10 - $12 a year or so ago.

That price is roughly equivalent to oil at USD $17.50. Given that some industrial and power generation uses do have the ability to switch, plus LNG prices being oil-linked as you mention, there's not much room for oil to drop further without taking gas down with it. That said, I'll add that gas pipeline charges and the cost of moving oil to site do complicate the economics there so it's not just about the commodity price.

In terms of gas storage in Australia:

Roma (Qld) holding 35 PJ (65% full)
Silver Springs (Qld) holding 22 PJ (48% full)

Moomba (SA) holding 21 PJ (30% full)

Iona (Vic) holding 19 PJ (74% full)
Dandenong LNG (Vic) holding 0.657 PJ (97% full)

Newcastle LNG (NSW) holding 1.492 PJ (96% full)

None of those would normally or officially be considered concerning at present levels. Personally though I'd rather Iona was higher - but then I'm more concerned about keeping the lights on than holding gas prices up.

As a technical clarification, Dandenong and Newcastle LNG facilities are not import or export terminals but peak shaving plants. That is, they comprise an LNG tank, a tiny on site LNG plant and a much greater capacity regasification capacity. Their function is to discharge at high rates to meet peak gas demand (extreme weather, failure of gas production or pipelines, etc) but the vast majority of the time they're either slowly filling or sitting idle. The gas stored comes from the same place it goes back into - they're storage only, not import or export. Gas > LNG > back to gas.

The others are all underground gas storage as gas not as LNG. That is, they're using natural underground reservoirs.

Where is the US oil patch heading?


We are not yet back over $30/bbl so the bottom line scenario is the best that could be hoped for.

ducati916 said:

A 10 mb/d cut after all? By early Friday, there seemed to be some momentum on negotiations. Bloomberg reported that Russia was open to a global pact. At the time of this writing, OPEC was rumored to be exploring a scenario in which Saudi cuts by 3 mb/d, Russia cuts by 1.5 mb/d, non-Saudi Gulf States cut by 1.5 mb/d, and the U.S., Canada and Brazil cut by nearly 2 mb/d.

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A problem I can see that the market will probably overlook at least initially is that the extent of supply surplus almost certainly exceeds 10 million bpd and plausibly by a fairly large amount given the extent to which things are shut down.

So if there's a 10 million barrel per day cut then the market will get excited sure but if that leaves a remaining 20 million barrel per day supply surplus then reality will bite in due course.

So price up then down again?

The above charts of WTI's near-term perspective show that the longer-term trend channel is actually more bearish. However, everything this week will rest on further "talks" as COVID-19 continues to add to demand destruction.
Last week showed the power of positive sentiment over fundamentals.

The US response to low oil prices is evident below:


It is interesting to note that oil rig numbers rose slightly from January to mid March, possibly indicating a need to keep finding more oil in response to lower prices, in the hope that cashflows could be maintained.
Rystad see a potential decline in the rig count to a few hundred, so LTO output will fall dramatically as it's an industry that relies on strong returns within the first few months, and a sharp tailing off afterwards.

Citi: Short-term supply cuts of 10 mb/d. Citi estimates that supply curtailments because of logistical bottlenecks and low prices could force 10 mb/d offline temporarily in April. Goldman Sachs put the figure at 5 mb/d. Goldman warned that eventually the market will snap back because of the shut ins. “This will likely be a game-changer for the industry,” the Goldman analysts said. “Once you damage the capital stock in oil it is an expensive and time-consuming process to rebuild, assuming it can be rebuilt at all.”



The cure for low prices, is low prices.

With all the damage done and being done, there will be a price spike higher going forward.

jog on
duc

jog on
duc