- In the U.S., demand for petroleum products plunged by 7 mb/d between March and April.
- Since then, demand has bounced back by 4 mb/d, according to Bank of America Merrill Lynch. Refiners initially shifted production mixes to relatively more diesel and less gasoline.
- But because the rebound is concentrated in gasoline, as millions of people returned to driving and shunned mass transit, refiners will have to switch back.
- “This surge in demand, coupled with aforementioned yield shifts have helped contain gasoline inventory builds in recent weeks, although they remain stubbornly high compared the seasonal five year historical range,” Bank of America said.
2. Refiners squeezed by new facilities
- A wave of “mega refineries” are set to come online over the next four years, mostly in China and the Middle East. This comes despite the fact that oil demand will not return to pre-pandemic levels until at least 2022, according to Goldman Sachs.
- The new capacity will lower overall refinery utilization worldwide by 3 percent.
- Thinner margins and stiff competition could force the shutdown of refineries in developed countries, Goldman warns.
- Gasoline fares much better than distillates, with passenger vehicle traffic returning quickly while jet fuel demand remains badly damaged.
3. Major write-downs increase scrutiny on majors
- BP (NYSE: BP)…
1. Gasoline demand rebounds, jet fuel stays down
- In the U.S., demand for petroleum products plunged by 7 mb/d between March and April.
- Since then, demand has bounced back by 4 mb/d, according to Bank of America Merrill Lynch. Refiners initially shifted production mixes to relatively more diesel and less gasoline.
- But because the rebound is concentrated in gasoline, as millions of people returned to driving and shunned mass transit, refiners will have to switch back.
- “This surge in demand, coupled with aforementioned yield shifts have helped contain gasoline inventory builds in recent weeks, although they remain stubbornly high compared the seasonal five year historical range,” Bank of America said.
2. Refiners squeezed by new facilities
- A wave of “mega refineries” are set to come online over the next four years, mostly in China and the Middle East. This comes despite the fact that oil demand will not return to pre-pandemic levels until at least 2022, according to Goldman Sachs.
- The new capacity will lower overall refinery utilization worldwide by 3 percent.
- Thinner margins and stiff competition could force the shutdown of refineries in developed countries, Goldman warns.
- Gasoline fares much better than distillates, with passenger vehicle traffic returning quickly while jet fuel demand remains badly damaged.
3. Major write-downs increase scrutiny on majors
- BP (NYSE: BP) wrote down $17.5 billion two weeks ago and Royal Dutch Shell (NYSE: RDS.A) said it would impair $15 to $22 billion.
- The enormous write-downs amount to an acknowledgement that some oil and gas assets will go unproduced, leaving them stranded.
- Behind the logic of write-downs is assumption about long-term oil prices. BP and Shell both lowered their forecast. Notably, Equinor (NYSE: EQNR) assumes oil prices around $80 per barrel, which suggests more write-downs are forthcoming.
- At the same time, ExxonMobil (NYSE: XOM) has stubbornly refused to write down assets and also does not disclose long-term oil price targets.
4. Jet fuel demand not set to rebound
- Global jet fuel demand accounted for 8 mb/d of oil demand prior to the pandemic, or 8 percent of total demand.
- While gasoline demand is bouncing back quickly, jet fuel consumption will not. Global travel measured in passenger kilometers declined by 94 percent in April, only recovering to 91 percent down in May, year-on-year.
- According to the International Air Transport Association, travel will recover to around 36 percent down by December. Or, in a more pessimistic scenario, December air travel will be down 53 percent, year-on-year.
- Around 2.5 million people passed through American airports each day at this time last year. At the end of June, only around 580,000 people per day traveled by air, which itself was a rebound from a low point of 87,500 people in mid-April, according to Standard Chartered.
5. Chesapeake succumbs to debt
- Chesapeake Energy (NYSE: CHK)filed for bankruptcy last Sunday. The bankruptcy comes after years of piling on debt in order to fuel growth.
- At its largest in 2008, Chesapeake controlled nearly 15 million acres of land. Natural gas production hit a high-water mark in 2014 at 4.2 billion cubic feet equivalent.
- Both land and production have been in decline for years as Chesapeake unloaded assets to pay off debt.
- The bankruptcy filing will wipe out $7 billion in debt.
- Nearly 240 North American shale companies have filed for bankruptcy since 2015.
6. Copper prices rally
- Copper just closed out its best quarter in a decade, made better by the deep plunge in March.
- The rally was built on a strong come back in demand from China, but also because of production troubles in the all-important supplier of Chile.
- Copper prices bottomed out at a three-year low in March below $4,700, before rallying above $6,000 per ton in recent days for the first time since January.
- The bullish forces on both the supply and demand sides of the equation meant that the 21-percent rally exceeded price gains of other commodities.
7. Aramco’s huge payout
- Saudi Aramco (TADAWUL: 2222) promised to pay out roughly $75 billion to investors went it partially went public last year on the domestic Saudi stock exchange.
- The payout is just about as much as the dividends of 9 global oil companies (listed in the chart) combined.
- While Aramco is the most profitable company in the world, and has rock-bottom production costs, the amount of cash it pays in royalties, corporate tax and dividends means that it will likely need to borrow in order to meet its obligations.
- Aramco’s capex needs, its goals of expanding its footprint, will be constrained by the hefty dividend payout.
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Can debt destroy the Federal Reserve? The 800 lb gorilla in the crony capitalism ballroom.
Chesapeake ran a high stakes poker game, with the usual helium filled reserve studies fodder for Wall Street and the media. Time runs out on all. Economic Gravity. Now they want Cultural Marxism with the same people in control. The "useful idiots" clueless as usual.
Chesapeake ran a high stakes poker game, with the usual helium filled reserve studies fodder for Wall Street and the media. Time runs out on all. Economic Gravity. Now they want Cultural Marxism with the same people in control. The "useful idiots" clueless as usual.