Oil Rally Unravels On New COVID-19 Lockdowns

Oil prices lost gains early this week after a new strain of Covid-19 is threatening the global demand recovery.

Chart of the Week

• Demand for transportation fuels (gasoline, distillates, and jet fuel) was down 11% during the Thanksgiving holiday compared to the holiday week a year earlier.
• Jet fuel, however, was down by nearly half, or a decline of about 0.9 mb/d.
• There were about 107,000 flights during the week of Thanksgiving, down about 45% from 2019 levels.

Market Movers

• ConocoPhillips (NYSE: COP) announced a significant oil discovery in the Norwegian Sea.
• Diamondback Energy (NASDAQ: FANG) announced a double deal to buy two rivals for a combined $3.2 billion. It will purchase QEP Resources (NYSE: QEP) and also Guidon Operating LLC. Enverus analyst said it is “a realization among small producers how difficult it is to deliver on returns expectations.”
• Royal Dutch Shell (NYSE: RDS.A) sold a 26.25% stake in Queensland Curtis LNG for $2.5 billion.

Tuesday December 22, 2020

Oil sentiment turned negative as near-term problems with demand have finally moved to the front burner after weeks of increasingly bullish sentiment. Dozens of countries cut off travel to the UK over fears of a coronavirus mutation. Lockdowns have also grown tighter in multiple places in December. “The nightmare before Christmas scenario has set in, with a combination of the ‘mutant virus’ compounded by Brexit angst,” said Stephen Innes, chief market strategist at Axi.

Goldman sees $65 oil. Despite the current challenges, Goldman is bullish on oil, expecting Brent to average $65 a barrel next year.

Congress’ Covid stimulus includes energy provisions. The $900 Covid-19 stimulus, combined with the omnibus spending bill, contained an array of energy-related provisions. The bill authorized $35 billion on a variety of renewable technologies over the next five years, and it extended tax credits. The U.S. Chamber of Commerce called it the most significant energy bill since 2007. The legislation also included a phase out of hydrofluorocarbons (HFCs), a highly potent greenhouse gas found in refrigerants. With little fanfare, the U.S. legislated the most significant action on climate change in years. 

Russia backs another 500,000 bpd increase. Despite renewed fears about oil demand due to the new coronavirus strain, the leader of the non-OPEC group in the OPEC+ pact, Russia, is still in favor of another 500,000 bpd increase in the alliance’s oil production from February.

Trans Mountain Expansion work temporarily halted. The long-distance Trans Mountain Expansion pipeline project, which would add a twin line to carry oil from Alberta to Canada’s Pacific Coast, has run into some trouble in recent weeks. Several safety mishaps, including the death of a worker, have forced the company to suspend work for the rest of the year. Related: Oil Extends Losses As Demand Fears Resurface

Contractor at Line 3 construction dies. Enbridge (NYSE: ENB) confirmed that a contractor working on Line 3 construction in Minnesota died in an accident on Friday.

Cushing inventories declining. Oil inventories at the Cushing hub declined to around 60 million barrels recently, heading towards normal levels.

Shell announced a $4.5 billion write-down. Royal Dutch Shell (NYSE: RDS.A) signaled that it would report its third consecutive loss in the fourth quarter, and that it would take a $4.5 billion write-down, much of which was related to its Appomattox project in the Gulf of Mexico.

Northeast states unveil cap-and-invest for cars. Northeast and mid-Atlantic states unveiled the Transportation & Climate Initiative, a coalition of states that cap emissions on the transportation sector and use the proceeds to invest in a variety of programs. The program is modeled after the Regional Greenhouse Gas Initiative (RGGI), which has been in place for years and caps emissions on major polluters. However, several states said they wouldn’t sign on for now.

Norwegian court opens up Arctic to more drilling. Norway’s top court dismissed a lawsuit from climate activists to halt Arctic oil exploration.

Saudi Arabia keeps oil flowing. The massive 5-mb/d East-West pipeline that carries Saudi oil to the Red Sea has been undergoing repairs since an attack in 2019. But oil continues to flow through a backup pipeline system. S&P Global Platts takes a look at Saudi oil infrastructure.

U.S. shale’s horrible year; pain is not over. U.S. shale will start 2021 producing about 7.5 mb/d, down 20% from the start of 2020. As demand begins to recover, OPEC+ will add supply back onto the market, raising questions about how much room there is for shale to recover. IHS Markit estimates that shale capex will total $54 billion in 2021, down by half compared to 2019, and up only slightly from 2020 levels. Also, some analysts say production could fall by another 1 mb/d next year.

Russia’s oil minister warns Biden. Joe Biden’s presidency will hopefully not interfere with OPEC+ actions taken to rebalance oil markets, Russian Deputy Prime Minister and former Energy Minister Alexander Novak said this week. “We can see that the new U.S. administration is making statements contradictory to the country’s policy from the last four years,” Novak said. “We hope that the changes to the policy of the U.S. administration will not have an impact on the joint actions, which, first of all, are designed to play a positive role for the global economy and energy markets.”

Iran woos Russian oil companies. Iran has stated its interest in attracting investments from Russian oil companies to help develop its oilfields, Russia’s TASS news agency said on Monday.

By Tom Kool of Oilprice.com

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