Investor Alert: As oil prices crash towards $20 on the back of an insufficient production cut agreement, all eyes will be on G20 developments and more production cut news over the weekend. If you haven't already signed up for Global Energy Alert then make sure you do so today to get expert analysis on what will happen on Monday when markets reopen.
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Friday, April 10th, 2020
OPEC+ agreed to the largest oil production cuts in history on Thursday, but oil prices crashed towards $20 as markets decided that a 10 million bpd cut was insufficient to balance the demand deficit. Today, the G20 will meet to discuss more cuts and more details will likely come out about the OPEC+ deal. Markets are closed today and so all eyes will be on developments over the weekend.
OPEC+ strike 10 mb/d deal, oil prices fall. OPEC+ agreed to joint cuts on the order of 10 mb/d, a historic agreement. The deal calls for both Saudi Arabia and Russia capping production at 8.5 mb/d for May and June, after which cuts would ease in phases – down to 8 mb/d and then to 6 mb/d of cuts. The deal was not received well by the markets, which sold off WTI and Brent over fears that the reductions are inadequate. “The supply and demand fundamentals are horrifying,” said OPEC Secretary-General Mohammed Barkindo.
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G20 meets to chip in. OPEC+ is also looking for help from other non-OPEC countries in the G20. Mexico temporarily held up the OPEC+ deal because it does not want to cut. At the time of this writing, Mexico’s president said that he spoke with President Trump, who promised to contribute to the cuts on Mexico’s behalf. “First they asked us for 400,000, then 350,000,” Mexico’s President Lopez Obrador said. Mexico was only able to cut by 100,000 barrels a day, and Trump “very generously expressed to me that they were going to help us with an additional 250,000 to what they are going to contribute. I thank him.”
Demand loss at 20-30 mb/d. The OPEC+ deal is historically large, but still insufficient to plug a 20 to 30 mb/d decline in demand. Inventories are set to rise in the coming months. “The proposed 10 million bpd cut by OPEC+ for May and June will keep the world from physically testing the limits of storage capacity and save prices from falling into a deep abyss, but it will still not restore the desired market balance,” Rystad Energy said.
Analysts say cuts are too little, too late. Other analysts also said the risk is to the downside. “These cuts are not enough to prevent massive stockbuilds in May, let alone April,” JBC Energy wrote in a note. Oil prices could fall back despite the cuts.
Bearish EIA data. The weekly EIA data was negative – crude inventories jumped by 15.2 million barrels, gasoline stocks rose by 10.5 million barrels, and gasoline demand fell by another 1.6 mb/d.
Enbridge: 20-25% of Canadian oil to be shut in. Enbridge’s (NYSE: ENB) CEO Al Monaco said that 20-25 percent of Western Canada’s oil production could be shut in because of low prices. Roughly 135,000 bpd has already been shut in. RBC predicts declines of 1.1 to 1.7 mb/d.
Flood of Saudi oil heading to U.S. Saudi Arabia is sending “a flood” of oil to the U.S. Gulf Coast, according to Bloomberg, with an estimated 14 million barrels en route, compared to just 2 million barrels a month ago.
IMF: Global economy hit worst since 1930s. The IMF said that just about all countries could see falling living standards this year, the first time that has occurred since the 1930s. “Today we are confronted with a crisis like no other,” the head of the IMF, Kristalina Georgieva, said.
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Nearly 17 million newly unemployed. Nearly 17 million people filed for unemployment insurance in the U.S. in the last three weeks. “In its first month alone, the coronavirus crisis is poised to exceed any comparison to the Great Recession,” Glassdoor Senior Economist Daniel Zhao told Politico.
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Banks to seize shale assets. Big U.S. lenders to shale drillers could seize energy assets in order to avoid losses from forthcoming bankruptcies, according to Reuters. JPMorgan, Wells Fargo, Bank of America and Citigroup are setting up companies to own oil and gas assets. The shale industry owes more than $200 billion in debt. “Banks can now believably wield the threat that they will foreclose on the company and its properties if they don’t pay their loan back,” Buddy Clark, a restructuring partner at law firm Haynes and Boone, told Reuters.
ExxonMobil to lower methane emissions. ExxonMobil (NYSE: XOM) said it would lower methane emissions at 1,000 of its Permian sites using drones, satellites and planes.
Franklin Resources preparing for Chesapeake default. Mutual-fund company Franklin Resources is taking steps to prepare for a potential bankruptcy by Chesapeake Energy (NYSE: CHK), according to the Wall Street Journal. Franklin Resources owns a significant portion of Chesapeake’s $9 billion in debt.
Occidental tells workers to write Congress for money. Occidental Petroleum’s (NYSE: OXY) CEO Vicki Hollub told her employees to send pre-written letters to Congress asking the government “to provide liquidity to the energy industry,” according to Bloomberg.
Coronavirus could kill fracking “fever dream.” The U.S. shale industry has never demonstrated profitability and has been built on a decade of cheap capital. “The dream was always an illusion,” Bethany McLean writes in the New York Times. “All that’s left to tally is the damage.”
Concho Resources shutting down Permian output. Concho Resources (NYSE: CXO) said that it is already curtailing production in the Permian. “Concho, as well as other operators in the Permian Basin, have begun shutting in uneconomic production in rapid response to the recent market shift,” the company said in a letter to the Texas Railroad Commission.
By Josh Owens for Oilprice.com
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Quite the opposite with interest rates this low and Banks from Coast to Coast being backstopped by the totality of the US Federal Reserve and Federal Government.
*Pennies per gallon* is the cash price at retail for the USA at the moment.
How could a 10 million barrels a day (mbd) cut impact on prices in a market sagging under the weight of a glut estimated at 1.8 billion barrels (between inventories and excess supply) and declining by some accounts by 30 mbd with half the population of the world in a lockdown.
The global oil market has already given its verdict on the OPEC+ deal. Oil prices declined. Now the market will demand more cuts with the same result.
It is far better for countries of the world to implement the strict measures that enabled China to control the outbreak and open the country to business again. This will certainly shorten the duration of the global lockdown and enable people to resume their normal activities including demand for crude oil rather than wasting their time making futile cuts in the current circumstances.
For the oil-producing countries of the world particularly those who are overwhelmingly dependent on the oil revenue, the only world of consolation that is appropriate is that they have to tighten their belts for a few more months and accept a quarter of a loaf instead of a full loaf until the outbreak is controlled and better days are with us.
Once the outbreak is contained, the global economy and China’s will behave like a patient who has been quarantined with no food. Once out of the quarantine, his appetite would be rapacious and this is exactly how the global economy and the global oil market will react with oil imports doubling if not tripling to recoup lost demand. Oil prices and demand will recoup all their previous losses.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London