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Oil Demand In Doubt As COVID Cases Climb

The price of WTI is once again below $40 as new COVID cases drive demand lower and Libya threatens to bring a new wave of supply online.

Chart of the Week

-    The average energy capacity cost of utility-scale battery storage has declined from $2,152 per kilowatt-hour in 2015 to just $625/kWh in 2018.

-    As of the end of 2018, the U.S. had 869 MW of installed energy storage capacity. 

-    The U.S. added 152 MW in 2019. In the first 7 months of 2020, the U.S. added 301 MW of energy storage capacity.   

Market Movers

-    Cenovus Energy (TSE: CVE) and Husky Energy (TSE: HSE) were upgraded to Buy from Hold at Stifel, after Cenovus said it would buy Husky (more on that below). Stifel says the deal is a “win-win.”

-    Energy Transfer (NYSE: ET) fell by nearly 8 percent in pre-market trading on Tuesday after it cut its dividend by 50 percent. 

-    Equinor (NYSE: EQNR) may have to shut its Hammerfest LNG plant in Norway for up to a year due to fire damage.

Tuesday, October 27, 2020

Oil prices declined on Monday on the worsening pandemic in Europe and the U.S. Meanwhile, fading hopes of a stimulus and the restart of Libyan oil production also weighed on the market. “Demand weakness is definitely the biggest worry and problem in the market right now,” said Bjarne Schieldrop, chief commodities analyst at SEB AB. “Supply is still fairly contained and controlled even with Libya coming back into the market.” Prices were up slightly in early trading on Tuesday. 

Total CEO: Second wave a threat to demand. Total (NYSE: TOT) CEO Patrick Pouyanne warned that surging coronavirus cases in much of Europe and the U.S. pose more risks to energy demand. “[G]lobally speaking, the demand is still weak. I am afraid that with the second wave we are experiencing in many continents today again, it could be longer [for demand] to recover like everybody hoped,” he said Related: U.S. And Canadian Oil Rig Counts Continue To Rebound

OPEC: Recovery taking longer. On Monday, OPEC’s Secretary-General admitted that the recovery in demand is delayed due to the pandemic. “We were hopeful the second half of 2020 would begin to see a recovery,” Barkindo said. “Unfortunately, both the economic growth and demand recovery remain anaemic at the moment due largely to the virus.” The outlook may lead to an extension of the current arrangement, rather than easing off the cuts as scheduled beginning in January.

U.S. Gulf Coast production cut 16% ahead of storm. Yet another storm is passing through the Gulf of Mexico, forcing around 16% of the region’s oil production to be temporarily shut in.

Rig count gains again. Baker Hughes reported on Friday that the number of oil rigs in the United States rose by 6 to 211. The total number of active oil and gas rigs increased for the week by 5, with oil rigs rising by 6 and gas rigs falling by 1.

BP swings to third-quarter profit. BP (NYSE: BP) reported an underlying replacement cost profit of $100 million, beating expectations. Without any major write-offs, the company’s outlook improved. CEO Bernard Looney said the company is “performing while transforming.” 

Poland utility announces pivot to renewables. Poland has often dragged its feet on Europe’s attempts to transition to renewables, but Poland’s largest utility just announced that it would shut its coal assets and switch to renewables in the coming decades. Currently, more than 80 percent of the utility’s generation comes from coal.

Private equity holding back as shale consolidates. Private equity is remaining on the sidelines as the U.S. shale industry begins to consolidate. “Everyone is getting into renewables,” a top energy private equity investor told Axios. “It's just a smarter long-term play, particularly as the macroeconomics of fossil fuels get worse and the macroeconomics of renewables get better.” Related: Alberta Set To Lift Mandatory Oil Production Cuts In December

Cenovus to buy Husky for $2.9 billion. Cenovus Energy (TSE: CVE) said it will buy Husky Energy (TSE: HSE) for $2.9 billion in an all-stock deal. The combined company will become Canada’s third-largest oil and gas producer. The deal would also create a consolidated refining powerhouse in the U.S. Midwest. Cenovus may cut up to 25% of the combined workforce.

Oil bankruptcy debt hits high. The associated debt from North American oil and gas bankruptcies in 2020 has already reached an all-time high. Although the combined count of Chapter 11 filings from exploration and production firms (E&Ps) and oilfield service (OFS) companies this year in North America has so far reached 84, which is still lower than the historical high of 142 in 2016, the associated debt these companies are carrying is much higher, at $89 billion so far, some $19 billion more than in 2016, according to Rystad Energy

Refining margins “absolutely terrible.” While oil prices have stabilized around $40 per barrel for the last few months, refining margins remain “absolutely terrible,” according to Total’s Patrick Pouyanne. Analysts expect downstream units to weigh heavily on the earnings of the oil majors. 

China hopes to dominate EV production. Chinese EV manufacturers are expected to start expanding overseas, while Beijing already controls a large part of the global EV supply chain, beginning with critical minerals processing.  

Canada LNG too expensive to compete. Canadian LNG is too expensive to be competitive in the biggest markets, notably the Chinese market. According to calculations by IEEFA, under the best-case scenario, Canadian LNG would cost $8.30 per million Btu. The average Chinese price for LNG at the city gate, however, is $8.23.

Election issues to watch. Aside from the race for president and control of Congress, some lower-key issues directly related to the oil and gas industry are at stake in next week’s election. A race for a seat on the Texas Railroad Commission could affect regulation in the state. Meanwhile, Democrats have a shot at taking at least partial control of the Texas and Pennsylvania state legislatures, which could have implications for taxation and regulation of the industry in those states.

Peak natural gas sooner than you think. There are “flashing signs that the U.S. power sector is approaching peak gas, with demand topping out decades ahead of schedule,” Bloomberg reports

BNEF: Total oil demand peaks in 2035. BNEF just released its New Energy Outlook 2020, which finds that energy emissions peaked in 2019. Renewables and EVs show rapid progress in the coming years, although natural gas is the only fossil fuel that continues to grow. Total oil demand peaks in 2035.

Morgan Stanley: E&Ps to watch. A shift towards “more returns, less growth” reveals a path forward for some shale drillers. Morgan Stanley says the best-positioned include Cimarex (NYSE: XEC), ConocoPhillips (NYSE: COP), and Pioneer Natural Resources (NYSE: PXD). The bank gave Overweight ratings to those companies. 

Report: Exxon-Guyana deal raises risk. A new report called into question the promise for Guyana from its deal with ExxonMobil (NYSE: XOM). The structure of the contract may leave the Guyanese government on the hook for payments to the oil producers. 

By Josh Owens for Oilprice.com

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