Saturday, March 28, 2020 /08:00
AM / by Tom Kool of Oilprice.com / Header Image Credit:
The brief rebound in oil prices was never
going to last in the current environment, and as the global crude glut nears
historic highs, prices are heading towards $20
March 27th, 2020
Markets rallied this week as the U.S. Congress appears poised to pass a $2
trillion stimulus plan. Jobless claims in the U.S. topped 3 million, with
economists seeing unemployment nearing Great Depression levels in the coming
months. Meanwhile, despite the rally for equities, oil prices did not hold up,
with WTI back down close to $20 per barrel as the historic glut continues to
plan scrapped. The U.S. Department of Energy withdrew its plan to
buy 77 million barrels of oil for the strategic petroleum reserve (SPR) after
funding for the plan was removed from the $2 trillion stimulus plan.
pressure majors to cut dividends. The top five oil majors added
$25 billion in debt last year, while hiking dividends. Now, on the ropes with
oil in the mid-$20s, debt will accumulate much faster. More investors are
calling for a cut to dividends. "Long term, it is appropriate to cut the
dividend. We are not in favor of raising debt to support the dividend," Jeffrey
Germain, a director at Brandes Investment Partners, told Reuters.
Latin American oil uneconomic. "Latin Americaâ€™s flowing
production is over 7 million barrels per day. At current prices, we estimate
that half is non-economic, taking into account all costs, including
transportation and taxes," Ruaraidh Montgomery from oil research firm Welligence,
gas inventories at record high. As of March 1, storage for gas
in Europe was 60 percent full, the highest ever recorded
at the start of March.
cuts worker pay. Occidental Petroleum (NYSE: OXY) cut salaries for
its U.S. workers by 30 percent.
Access loses court case. The Standing Rock Sioux Tribe won a major
victory in federal court this week, with a judge ordering a full environmental
impact statement for the Dakota Access pipeline. The project owned by Energy
Transfer Partners (NYSE: ET) has already been operational for
three years. The decision could potentially lead to the shutdown of the
pressures MbS on oil price war. Secretary of State Mike Pompeo
spoke with Saudi Crown Prince Mohammed bin Salman by phone this week, asking
for the Saudis to pull back from the price war. Pompeo urged Riyadh to "rise to the occasion and reassure" energy markets at a time of economic
accuse Saudi Arabia of economic warfare. A group of Republican
senators sent Sec. of State Mike Pompeo a letter, accusing
Saudi Arabia of economic warfare because of Riyadhâ€™s decision to increase oil
production. The letter said the U.S. could explore antitrust authority as well
as revisit support for the war in Yemen, a clear threat to Saudi Arabia.
Arabia struggling to find buyers. Saudi Arabia is struggling to
find buyers for extra oil as demand collapses. Royal Dutch Shell (NYSE: RDS.A),
Chinaâ€™s Unipec, Finlandâ€™s Neste, some Indian refiners and other U.S. refiners
are taking less crude from Saudi Arabia, according to Reuters. Taken
together, the inability to find buyers reduces the odds of Saudi Arabia ramping
up production aggressively to over 12 mb/d.
shut in of production in 35 years. In certain areas oil prices
is trading in single digits. Bloomberg notes that
Wyoming Sweet oil was trading at $1.75 per barrel this week, forcing some small
producers to shut in. That could happen in many places around the world. "We
need to cut crude supply by 10 million barrels a day pretty quickly," Russel
Hardy, the head of top independent oil trader Vitol Group, told Bloomberg. "Oil
prices will need to go lower, to bring the prices to a level that triggers a
mb/d surplus. New estimates from a series of oil market
analysts put the drop in demand from the pandemic at about 20 mb/d, a figure
that is dramatically larger than estimates from as recently as a week ago.
Goldman put it at 18.7 mb/d. It is the
largest decline in history by far, and one so large that a return of OPEC+ cuts
would not address.
struggles to restart amid global recession. The worst of
Chinaâ€™s pandemic is over, but the restart of factories in China is running into
trouble as the rest of the world goes into lockdown and cancels purchases of a
variety of Chinese goods. "The unprecedented shutdown of normal economic
activity across Europe, the U.S. and a growing number of emerging markets is
certain to cause a dramatic contraction in Chinese exports, probably in the
range of a 20-45% year-on-year drop in the second quarter," said Thomas
Gatley, senior analyst at research firm Gavekal Dragonomics.
industry seeks roll back of bag bans. Producers of plastic are lobbying to reverse
plastic bag bans across the United States, using the pandemic as a reason to
allow more disposable plastic.
storage filling up. The world is estimated to have between 0.9
and 1.8 billion barrels of oil storage capacity, with the industry using 71 percent currently.
But crude qualities cannot be stored together, and there are other logistical
bottlenecks preventing full use of all storage facilities. Traders told Reuters
that storage in the U.S. could reach capacity by May or June. Canadian output
could begin to fall in April as storage maxes out.
oil sands shut ins begin. Western Canada Select is trading at
around $9 per barrel, forcing some shut-ins. Suncor Energy (NYSE: SU)
said it would shut
in one of its trains at its Fort Hills project.
prices plunge. $1 gasoline is popping up in a growing number of
regions in the U.S. Nationally, retail gasoline prices are set to average $1.49
per gallon by mid-April. "You almost canâ€™t even give it away," Paul Bingham,
head transportation economist at IHS Markit Ltd., told Bloomberg. "The price
elasticity has totally changed. Itâ€™s full-on demand destruction."
to cut spending by 30 percent. Petrobras (NYSE: PBR) said it would cut
2020 spending by 30 percent to $8.5 billion and lower its production by 100,000
bpd. That includes shutting in shallow water production of 23,000 bpd.
asks IOCs to cut spending by 30 percent. Iraq asked four
international oil companies to lower their
spending by 30 percent, a list that includes Eni (NYSE: E), ExxonMobil
(NYSE: XOM), Lukoil and BP (NYSE: BP).
The request would ease a burden on Iraqi budgets.
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