Is The Permian Basin Getting Gassier?

1. Is the Permian getting gassier?

- “We expect Permian gross gas production to increase by more than 4.5 billion cubic feet per day between the fourth quarter of 2019 and the fourth quarter of 2021,” Rystad Energy said in a report.

- One of the main concerns about the Permian is that production is increasingly becoming gassier, that is, the gas-to-oil ratio of the hydrocarbons is leaning in a natural gas direction. While that is certainly true for wells as they age, Rystad said there is less of a concern with new wells.

- “We should stress that we do not expect any significant buildup in the gas-oil ratio (GOR) across the Permian basin in the short term,” Rystad said.

- The GOR would rise if the overall drilling pace slows down, as aging wells would make up a larger share of the total output.

- “[W]e do not think Permian gas production will necessarily outpace oil in 2020 as long as the activity level stays robust and operators intentionally decide to focus on the areas and zones with the maximum oil content,” Rystad said.

2. Palladium prices take a breather

- The impressive price rally for palladium – the best performing commodity in 2019 – came to a halt because of the coronavirus, but prices have not slumped like other commodities.

- In fact, palladium prices are up roughly 20 percent year-to-date.

- The durability of palladium prices may come as a surprise since the metal’s main use is in the auto sector, which has been severely hit by the coronavirus, as well as a broader slump in the past year from slowing sales.

- “The auto market is the largest consumer of palladium, representing 83% of global consumption, and we estimate that China’s consumption exceeded that of North America in 2019, making up a quarter of global auto-catalyst demand,” Standard Chartered wrote in a note.

- IHS Markit estimates the coronavirus led to 350,000 units of lost auto production in China.

- Still, palladium looks to stay in decent shape. “We forecast a palladium market deficit in excess of 700koz in 2020,” Standard Chartered added. “Despite industry estimates of a reduction in China’s auto production we think the market is likely to remain undersupplied.”

3. Cheap fuels drag down EU carbon price

- European carbon prices recently fell below 23 euros per ton for the first time since October.

- The contraction in manufacturing in some countries, particularly in Germany, are part of the problem.

- But the global glut for gas is also dragging down carbon prices. The “rerouting of LNG supply from Asia to Europe after LNG prices in Asia recently dropped below $3 per MMBtu for the first time since records began in 2010” have led to a gas surplus in Europe, Commerzbank said.

- As a result, utilities are switching from coal to gas, reducing the need for emissions permits.

- Mild winter temperatures are also reducing electricity demand.

- Coal markets are feeling the fallout from the global gas glut.

4. Oil index at all-time lows

- The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) recently touched an all-time low. The index consists of oil and gas E&Ps in the U.S., and is somewhat of a proxy for the shale industry.

- The energy sector has been the worst-performing portion of the S&P 500 for more than a year, and the slump has continued into 2020. Investors have turned against oil and gas names.

- For instance, the fund’s largest holding is Apache Corp. (NYSE: APA), with about 3.6 percent of the ETF. Apache’s shares have fallen by more than half in the last five years, and that is comparatively better than some of its peers.

- XOP also holds shares of Occidental (NYSE: OXY), which has lost half its value just since September 2018.

5. Oil Surplus in 1Q2020

- The IEA cut its oil demand forecast, predicting a 435,000-bpd decline in demand in the first quarter from a year earlier, the first absolute contraction in more than a decade. That compares to an 800,000-bpd increase in its previous estimate.

- The “call on OPEC” falls to 27.2 mb/d in 1Q2020, which is 1.7 mb/d below what OPEC produced in January.

- In other words, there is set to be a rather substantial surplus in the first few months of the year.

- The oil market had entered 2020 on track for a smaller surplus, but the shutdown of a part of China’s economy has made the overhang much worse.

6. Shale burns through $150 billion in cash flow

- The U.S. shale industry has burned through $150 billion in cash flow since 2012, having never really been cash flow positive for an extended period of time.

- Wall Street has lost patience and began closing the financial spigot over the last year or two. The rig count has fallen sharply, and is down by about 25 percent even in the Permian basin.

- “North America is full of companies that, on the E&P side, probably shouldn’t be here anymore,” Marcel Hewamudalige, a Houston-based managing director at Evercore Group LLC, told Bloomberg. “There’s too much debt in the system and those guys won’t survive.”

- The oil majors are the main drivers of growth at this point. They are less sensitive to short-term price swings. ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) have multi-year drilling programs to ramp up to 1 mb/d and 0.9 mb/d in the Permian, respectively.

7. Global GDP downgraded

- Forecasts for GDP growth for many countries have been downgraded. China’s GDP will expand by 4.5 percent i n the first quarter and by 5 percent in the second. The first figure is 1.5 percentage points lower than last month’s forecast.

- “On the supply side, Wuhan and many other Chinese regions are key manufacturing hubs for vehicles and other goods. Hyundai and Nissan shut car factories in Korea and Japan after running out of components from China and there are likely to be other disruptions globally,” the IEA said in its latest report.

- But the knock-on effect is global. Global supply chains are impacted. Also, Chinese tourists are the most numerous in the world.

- The U.S. is expected to lose 0.4 percentage points off its annualized GDP growth rate in the first quarter, “as a result of lower tourism from China and reduced trade,” the IEA warned.