Jul 02 | 2020
Crippling Impact of Crude Glut
By Lori Musser
A few short months ago, a world in which the price of oil could drop into the negative was unimaginable. Then came Covid-19, and history was made.
On Apr. 20, 2020, the May delivery price for U.S. benchmark crude, West Texas Intermediate, plummeted to minus US$37.63 a barrel. The economics were simple: the Covid-19 fallout was decimating consumption, and the amount of oil in storage was rising. Storage facilities – tanks, ships and pipelines – were reportedly full to bursting. The oil companies had to pay buyers to take their product.
Garrett Golding is a business economist in the research department at the Federal Reserve Bank of Dallas. Golding noted that the 2015-2016 downturn, while powerful enough to encourage many exploration and production companies to look for cost savings within and along the supply chain, was nothing like this. Speaking at the end of May, Golding said to Breakbulk: “It has been an unprecedented two months. We haven’t seen a price collapse like this before. In a lot of ways, it is new ground.”
The energy industry is still righting itself, with many companies shutting in production, curtailing capital expenditures, racking up debt and facing bankruptcy.
Golding said, going forward, per barrel pricing will be an issue. “Even given a relatively optimistic outlook, the prices [forecasted] are below the level at which many companies will be profitable. This is a meteor that has hit the industry.”
Oil and gas produced by hydraulic fracturing operations, or fracking, has tumbled even more than that produced by drilling, according to Jarand Rystad, CEO of Rystad Energy.
Rystad said that a May scan by satellite of 30,000 different well coordinates saw only 92 active fracking crews. “In terms of fracking levels in the U.S. – it collapsed.” In February, Rystad Energy ShaleWellCube reported 1,238 working shale wells, and in May it anticipated 308 for the month, a dip of roughly 75 percent.
In the U.S. onshore market segment, production in June will drop from almost 12.9 million barrels to 11.8 million barrels, said Rystad. Offshore production is being slashed as well.
On the other side of the coin, there will be an 880-million barrel drop in total oil demand in the U.S. in 2020, as calculated by Rystad Energy; that includes year-over-year drops of 11 percent for road fuel, 33 percent for jet fuel, and 33 percent for all other fossil fuels.
An Overcorrection?
The level of U.S. well closures may be high, but a lack of storage is an ongoing issue.
Rystad Energy OilMarketCube has revised its June 2020 global market outlook for non-OPEC+ oil production downward by almost 4 million barrels per day (since its mid-March estimate) with the greatest reductions coming from the U.S., at 2.2 million barrels per day, and from Canada, at 1.4 million.
Global energy was already at a crossroads in the lead-up to the pandemic, with a Saudi Arabia-Russia price war. In the U.S., industry observers noticed a move toward lower levels of longer-term capital expenditure.
Some companies, like Apache, were pulling rigs out of West Texas’ Permian Basin. Others, like Chevron, were promising shareholders a mix of cost-cutting and measured production growth. In early February, according to Bloomberg, private equity firm Kimmeridge Energy Management called the shale sector “uninvestable” and in need of radical action to combat heavy overhead costs and unsustainable expansion. Wall Street was beginning to foretell that global oil demand would contract in 2020 for only the fourth time in nearly four decades.
The Covid-19 demand plunge then pushed OPEC and its oil producing allies, including Mexico, to agree in April to cut production by 9.7 million barrels per day – the largest cut in history.
In the U.S., when the market signaled there was no room left in Cushing (Oklahoma’s massive energy storage hub), well shut-ins and curtailed production began.
Golding cautioned that the U.S. may not have seen the last of the storage issue. “That’s a possibility to be wary of. It is likely that we will see another price drop if too much production comes back too quickly.”
Recovery, Eventually
All may not be lost for the populations and service providers that rely on the oil and gas industry for their livelihoods. There will be a recovery. In fact, it has already begun.
Golding said: “We’ve definitely seen a large slash in spending. We’re going to be down at this new level for at least the next few quarters. But if oil goes above US$30, the industry might start redeploying frack crews, etc.” When per barrel prices rise to US$40, US$50 or more, and there is a more certain outlook on the public health side, Golding said demand will be more sustainable, although even at that level there aren’t a lot of companies that are going to be profitable. “It will be several quarters before we get back spending at the 2019 level, if we get back to it again,” Golding said.
Data from Dallas Fed forecasts that the decline of U.S. oil and gas will drag down U.S. business fixed investment in second quarter 2020 by about 6.1 percentage points.
“From a low of 72 million barrels per day, [global] oil demand will recover at 6 million barrels per day every month from May through July,” Rystad said. Future peak oil demand will be impacted significantly by Covid-19 due to wide-ranging factors impacting demand, such as a lower GDP for a longer time, decreased road miles – due to less public commuting, more home office use, less business and vacation travel and so on, and greater electric vehicle use.
But by 2025 global demand should be back to higher levels than in 2019. “We think that peak oil is still in front of us rather than behind us, but still, of course, many things can happen that are not transparent as we speak,” Rystad said.
Oil and Gas Project Cargo Suffers
The energy industry has long been an important project cargo client for ocean and inland carriers, forwarders, risk insurers, and other companies along the supply chain. For those that specialize in oil and gas, troubles are at hand.
Port Houston is a top U.S. project cargo hub. Executive Director Roger Guenther said that, while total cargo was down in the first four months of the year by 3 percent, steel tonnage continues to lag 2019 by 50 percent. This downturn was under way prior to the Covid-19 pandemic, as oil production was already beginning to taper off and tariffs were beginning to impact import steel supporting the energy industry.
At the port, “landside and waterside expansion projects have continued uninterrupted. We must ensure that the necessary infrastructure and capacity is in place to help the economy bounce back once this global pandemic has been controlled,” Guenther said.
But while capital expenditures have taken a dive, not all energy projects have been postponed or cancelled, especially offshore.
“We are only seeing a 26 percent destruction of [global exploration and production] investments because there are a lot of things already locked in … the biggest cuts are in shale; we are seeing an almost 50 percent cut in shale investments in 2020 versus 2019, and also oil sands [-42 percent], while deep water is more robust,” Rystad said.
Total global final investment decisions in new petroleum projects worldwide, which surged in 2019 and were expected to surpass US$200 billion in 2020, are now expected to come in closer to US$30 billion. “In terms of new sanctioning activity, of course in 2020 we will see an extreme drop versus the levels we expected … now basically every company is trying to postpone everything they can,” Rystad said. “You have to go back to the 1950s to see levels as low as we are seeing in 2020.”
Golding believes that this will have a significant impact on the future. “There are going to be fewer companies out there. The U.S. [oil and gas] industry was already having a difficult time and cutting spending. It is hard to see how it can return to where it was before with respect to the CapEx levels,” he said.
The biggest wildcard for the industry is how consumer behavior will change after the pandemic. If fewer people are driving to work or flying, there are massive implications for energy demand.
“This is an extremely uncertain time,” Golding succinctly summarized.
Based in the U.S., Lori Musser is a veteran shipping industry writer.
Image credit: Port Houston
A few short months ago, a world in which the price of oil could drop into the negative was unimaginable. Then came Covid-19, and history was made.On Apr. 20, 2020, the May delivery price for U.S. benchmark crude, West Texas Intermediate, plummeted to minus US$37.63 a barrel. The economics were simple: the Covid-19 fallout was decimating consumption, and the amount of oil in storage was rising. Storage facilities – tanks, ships and pipelines – were reportedly full to bursting. The oil companies had to pay buyers to take their product.
Garrett Golding is a business economist in the research department at the Federal Reserve Bank of Dallas. Golding noted that the 2015-2016 downturn, while powerful enough to encourage many exploration and production companies to look for cost savings within and along the supply chain, was nothing like this. Speaking at the end of May, Golding said to Breakbulk: “It has been an unprecedented two months. We haven’t seen a price collapse like this before. In a lot of ways, it is new ground.”
The energy industry is still righting itself, with many companies shutting in production, curtailing capital expenditures, racking up debt and facing bankruptcy.
Golding said, going forward, per barrel pricing will be an issue. “Even given a relatively optimistic outlook, the prices [forecasted] are below the level at which many companies will be profitable. This is a meteor that has hit the industry.”
Oil and gas produced by hydraulic fracturing operations, or fracking, has tumbled even more than that produced by drilling, according to Jarand Rystad, CEO of Rystad Energy.
Rystad said that a May scan by satellite of 30,000 different well coordinates saw only 92 active fracking crews. “In terms of fracking levels in the U.S. – it collapsed.” In February, Rystad Energy ShaleWellCube reported 1,238 working shale wells, and in May it anticipated 308 for the month, a dip of roughly 75 percent.
In the U.S. onshore market segment, production in June will drop from almost 12.9 million barrels to 11.8 million barrels, said Rystad. Offshore production is being slashed as well.
On the other side of the coin, there will be an 880-million barrel drop in total oil demand in the U.S. in 2020, as calculated by Rystad Energy; that includes year-over-year drops of 11 percent for road fuel, 33 percent for jet fuel, and 33 percent for all other fossil fuels.
An Overcorrection?
The level of U.S. well closures may be high, but a lack of storage is an ongoing issue.
Rystad Energy OilMarketCube has revised its June 2020 global market outlook for non-OPEC+ oil production downward by almost 4 million barrels per day (since its mid-March estimate) with the greatest reductions coming from the U.S., at 2.2 million barrels per day, and from Canada, at 1.4 million.
Global energy was already at a crossroads in the lead-up to the pandemic, with a Saudi Arabia-Russia price war. In the U.S., industry observers noticed a move toward lower levels of longer-term capital expenditure.
Some companies, like Apache, were pulling rigs out of West Texas’ Permian Basin. Others, like Chevron, were promising shareholders a mix of cost-cutting and measured production growth. In early February, according to Bloomberg, private equity firm Kimmeridge Energy Management called the shale sector “uninvestable” and in need of radical action to combat heavy overhead costs and unsustainable expansion. Wall Street was beginning to foretell that global oil demand would contract in 2020 for only the fourth time in nearly four decades.
The Covid-19 demand plunge then pushed OPEC and its oil producing allies, including Mexico, to agree in April to cut production by 9.7 million barrels per day – the largest cut in history.
In the U.S., when the market signaled there was no room left in Cushing (Oklahoma’s massive energy storage hub), well shut-ins and curtailed production began.
Golding cautioned that the U.S. may not have seen the last of the storage issue. “That’s a possibility to be wary of. It is likely that we will see another price drop if too much production comes back too quickly.”
Recovery, Eventually
All may not be lost for the populations and service providers that rely on the oil and gas industry for their livelihoods. There will be a recovery. In fact, it has already begun.
Golding said: “We’ve definitely seen a large slash in spending. We’re going to be down at this new level for at least the next few quarters. But if oil goes above US$30, the industry might start redeploying frack crews, etc.” When per barrel prices rise to US$40, US$50 or more, and there is a more certain outlook on the public health side, Golding said demand will be more sustainable, although even at that level there aren’t a lot of companies that are going to be profitable. “It will be several quarters before we get back spending at the 2019 level, if we get back to it again,” Golding said.
Data from Dallas Fed forecasts that the decline of U.S. oil and gas will drag down U.S. business fixed investment in second quarter 2020 by about 6.1 percentage points.
“From a low of 72 million barrels per day, [global] oil demand will recover at 6 million barrels per day every month from May through July,” Rystad said. Future peak oil demand will be impacted significantly by Covid-19 due to wide-ranging factors impacting demand, such as a lower GDP for a longer time, decreased road miles – due to less public commuting, more home office use, less business and vacation travel and so on, and greater electric vehicle use.
But by 2025 global demand should be back to higher levels than in 2019. “We think that peak oil is still in front of us rather than behind us, but still, of course, many things can happen that are not transparent as we speak,” Rystad said.
Oil and Gas Project Cargo Suffers
The energy industry has long been an important project cargo client for ocean and inland carriers, forwarders, risk insurers, and other companies along the supply chain. For those that specialize in oil and gas, troubles are at hand.
Port Houston is a top U.S. project cargo hub. Executive Director Roger Guenther said that, while total cargo was down in the first four months of the year by 3 percent, steel tonnage continues to lag 2019 by 50 percent. This downturn was under way prior to the Covid-19 pandemic, as oil production was already beginning to taper off and tariffs were beginning to impact import steel supporting the energy industry.
At the port, “landside and waterside expansion projects have continued uninterrupted. We must ensure that the necessary infrastructure and capacity is in place to help the economy bounce back once this global pandemic has been controlled,” Guenther said.
But while capital expenditures have taken a dive, not all energy projects have been postponed or cancelled, especially offshore.
“We are only seeing a 26 percent destruction of [global exploration and production] investments because there are a lot of things already locked in … the biggest cuts are in shale; we are seeing an almost 50 percent cut in shale investments in 2020 versus 2019, and also oil sands [-42 percent], while deep water is more robust,” Rystad said.
Total global final investment decisions in new petroleum projects worldwide, which surged in 2019 and were expected to surpass US$200 billion in 2020, are now expected to come in closer to US$30 billion. “In terms of new sanctioning activity, of course in 2020 we will see an extreme drop versus the levels we expected … now basically every company is trying to postpone everything they can,” Rystad said. “You have to go back to the 1950s to see levels as low as we are seeing in 2020.”
Golding believes that this will have a significant impact on the future. “There are going to be fewer companies out there. The U.S. [oil and gas] industry was already having a difficult time and cutting spending. It is hard to see how it can return to where it was before with respect to the CapEx levels,” he said.
The biggest wildcard for the industry is how consumer behavior will change after the pandemic. If fewer people are driving to work or flying, there are massive implications for energy demand.
“This is an extremely uncertain time,” Golding succinctly summarized.
Based in the U.S., Lori Musser is a veteran shipping industry writer.
Image credit: Port Houston
