Has Oil Demand Peaked?

1. BP sees oil demand already at a peak

- BP (NYSE: BP) made major headlines this week when it released its latest energy outlook, which laid out three scenarios, all of which show oil demand either already having peaked, or peaking in the next few years in the most optimistic scenario.

- In BP’s middle-of-the-road scenario (“Rapid), oil demand falls by half by 2050 to under 55 mb/d, while a more ambitious climate-focused “Net Zero” scenario leads to an 80 percent decline in demand. “Demand for oil falls over the next 30 years,” BP said in the report. “The scale and pace of this decline is driven by the increasing efficiency and electrification of road transportation.”

- At the same time, BP sees natural gas demand mostly unchanged through 2050 in the more, holding up much better than crude oil. In the business-as-usual scenario, natural gas demand actually rises by 35 percent. But in the “Net Zero” scenario sees gas demand falling by 40 percent.

- BP has staked a claim as the first oil major to jump on board with the “peak demand” mantra, and the British oil giant has plans to transition into a diverse energy company, which includes ramping up renewables and cutting oil and gas production by 40 percent over the next decade.

2. Exxon’s fall from grace

- ExxonMobil (NYSE: XOM) has seen its position erode rapidly in recent years, losing 60 percent of its market capitalization in seven years.

- Exxon is expected to post a loss of $1 billion in 2020, and it was recently removed from the Dow Jones Industrial Average.

- The oil major spent $261 billion between 2009 and 2019, piling on $45 billion in debt. Return on capital employed declined from 16 percent in 2009 to 4 percent in 2019.

- Exxon has hung on to its plans to keep dividends intact, despite the rising financial pressure. The dividend yield is now around 10 percent, and traders in the options market are betting that Exxon will be forced to cut its dividend, according to a new note from Susquehanna Financial Group.

3. Upstream spending collapses

- At $40 per barrel, roughly half of 50 international oil companies surveyed by Wood Mackenzie are cash flow negative.

- The industry wrote down $160 billion in the first half of the year, with the top seven oil majors alone accounting for $57 billion in impairments. Any improvement in cash flow will go to whittling away at mounting debt.

- Global upstream investment is set to fall to $310 billion in 2020, down by 30 percent from 2019 levels, and down 60 percent from the 2014 peak at $730 billion.

- Greenfield FIDs may only hit 10 this year, down from 40 in 2019.

- The upside argument is that the shortfall in investment will tighten up the market. “An extended lull in investment in liquids supply today will help rebalance the current oversupplied market,” Wood Mackenzie said. “But if demand recovers back to 100 million b/d as we expect over the next two or three years, the market will tighten.”

4. Shale group posts $3.3 billion in negative cash flow

- A survey of 34 North American oil and gas companies by IEEFA found that the group reported a combined net negative cash flow of $3.3 billion in the second quarter.

- Of the 34, 27 companies were cash-flow negative. EOG (NYSE: EOG) stood out with $360 million in negative cash flow, and Continental Resources (NYSE: CLR) reported $334 million in negative cash flow.

- “Collectively, the companies in IEEFA’s sample racked up negative free cash flows every single year from 2010to 2019,” the report said. Together, the group spent $29 billion more than they generated since 2017.

- The seven companies reporting positive cash flow were: Chesapeake Energy (NYSE: CHK), CNX (NYSE: CNX), Concho Resources (NYSE: CXO), EQT (NYSE: EQT), National Fuel Gas (NYSE: NFG), Northern Oil and Gas (NYSEAMERICAN: NOG) and Penn Virginia Corp. (NASDAQ: PVAC).

5. Completed wells, but not new drilling

- U.S. oil production bottomed out at around 10 mb/d in May, while the restoration of shut-in wells has allowed output to climb back a bit.

- Producers are now working through a tremendous backlog of drilled but uncompleted wells – a less expensive way of bringing new production online. Completed wells increased dramatically in July and August.

- In 2019, the industry completed roughly 11,000 wells, or 900 per month. In the first half of 2020, the industry completed an average of 670 per month, with a low point in May and June at only 200 wells each.

- That is not enough to offset base decline rates. The IEA estimates that around 850 wells need to be completed each month to keep production flat.

- With that pace unlikely to be reached, overall U.S. oil production should begin to erode. However, the decline rates ease in 2021.

- The agency estimates that another 100 rigs will have to be added back into the field to keep production flat next year.

6. Supply disruptions tighten markets for platinum and rhodium

- Covid-19 has led to “steep” supply losses for platinum and rhodium in South Africa, helping to tighten up the markets for both precious metals, according to Standard Chartered.

- At the same time, the drop in demand for platinum – used for efficient exhaust technologies in cars – have made the supply deficit much less severe.

- Still, at the start of the year, analysts expected oversupply for platinum. The supply losses have led to a “balanced” market instead, Standard Chartered said.

- The Platinum Group Metals (PGMs) basket price may continue to rise in the second half of 2020 due to unexpected outages related to the potential return of COVID-19 lockdown measures.

- “Historically supply shock-driven price action is unlikely to be sustained, but supply recovery this time is likely to temper price gains given scope for investment demand to continue to grow,” Standard Chartered said.

7. EU carbon prices skyrocket again

- The Environmental Committee of the European Parliament voted last week for a new EU-wide carbon reduction target – down 60 percent by 2030 from 1990 levels. The proposal will still require the full parliament’s approval and could be watered down. The EU’s top official suggested a target of at least a 55 percent reduction.

- The EU already achieved a 23 percent reduction below 1990 levels back in 2018.

- Carbon prices shot above 30 euros per ton on the stricter targets. Higher carbon prices made coal increasingly uncompetitive, on top of coal’s existing challenges in the market. Coal use has collapsed. Coal prices traded at around $100 per ton in 2018, but have fallen by more than half since then. Coal futures in Europe for 2021 are trading at around $45 per ton.

- Still, it is not clear if there is more room for carbon prices to rise. “However, even if the EU’s ambitious climate policy is providing considerable tailwind and the carbon price surged by 7.5% to reach €30.5 yesterday, we believe that it will only be able to lastingly exceed the €30 per ton mark next year given that the economic environment will remain difficult for the time being,” Commerzbank wrote.