Friday, March 6, 2020
1. Russia Kills Saudi Arabia's Plans For Deeper Cuts
- Saudi Arabia was pushing OPEC+ to cut deeper, but Russia has refused and now the OPEC+ partnership is on the rocks.
- This was the least likely outcome from the meeting, with most analysts expecting some form of cut. "A week ago the prospects for a meaningful agreement seemed low…However, a different Russian stance seems to have emerged this week, with policy moved along not only by the approach of the OPEC+ meeting but also by last week's sharp price falls and the spread of coronavirus into Europe," Standard Chartered wrote in a note.
- OPEC's Joint Technical Committee had increased its recommendation to between 0.6 and 1 mb/d, up from just 0.6 mb/d previously.
- OPEC has already made several cuts, along with involuntary outages, pushing collective output to a 10-year low.
2. LNG glut until mid-2020s
- The glut for LNG could last until the mid-2020s, according to data from Morgan Stanley.
- "2020 global gas oversupply looks materially worse than 2019, with nearly 50mt of excess LNG that needs to find a home - before accounting for any demand loss from the coronavirus in China," the investment bank wrote.
- Morgan Stanley said that coal-to-gas switching in Europe could mop up about half of that excess, but that still leaves a surplus of 23mt (~3.1 billion cubic feet/day).
- "Without meaningful storage capacity in Asia,…
Friday, March 6, 2020
1. Russia Kills Saudi Arabia's Plans For Deeper Cuts
- Saudi Arabia was pushing OPEC+ to cut deeper, but Russia has refused and now the OPEC+ partnership is on the rocks.
- This was the least likely outcome from the meeting, with most analysts expecting some form of cut. "A week ago the prospects for a meaningful agreement seemed low…However, a different Russian stance seems to have emerged this week, with policy moved along not only by the approach of the OPEC+ meeting but also by last week's sharp price falls and the spread of coronavirus into Europe," Standard Chartered wrote in a note.
- OPEC's Joint Technical Committee had increased its recommendation to between 0.6 and 1 mb/d, up from just 0.6 mb/d previously.
- OPEC has already made several cuts, along with involuntary outages, pushing collective output to a 10-year low.
2. LNG glut until mid-2020s
- The glut for LNG could last until the mid-2020s, according to data from Morgan Stanley.
- "2020 global gas oversupply looks materially worse than 2019, with nearly 50mt of excess LNG that needs to find a home - before accounting for any demand loss from the coronavirus in China," the investment bank wrote.
- Morgan Stanley said that coal-to-gas switching in Europe could mop up about half of that excess, but that still leaves a surplus of 23mt (~3.1 billion cubic feet/day).
- "Without meaningful storage capacity in Asia, Europe is the only outlet for this excess gas and already has storage levels well above normal," Morgan Stanley noted.
- The result could be supply curtailment from the United States. "We see risk of US gas prices breaking down into the $1.50-$1.75 range when these LNG curtailments first show up (likely in 2Q20)," the bank concluded.
3. Access to finance tightening for oil companies
- With the oil market turning south, the financial noose on embattled oil and gas drillers is tightening. The industry is on the eve of the twice-a-year credit redetermination period, when lenders reassess the borrowing bases they offer to drillers.
- Investors and analysts estimate that banks will slash their credit lines to drillers by 10 to 20 percent this spring, Bloomberg reports.
- "The banks can kick the can down the road and say 'there's no point of pushing everybody into bankruptcy, we'll wait until October,'" Shaia Hosseinzadeh, founder of OnyxPoint Global Management LP, told Bloomberg. "But if it's business as usual, it's going to be a horror show."
- The energy bonds of a growing number of companies are falling into distressed territory, including California Resources Corp. (NYSE: CRC), Range Resources Corp. (NYSE: RRC), Southwestern Energy Co. (NYSE: SWN), Antero Resources Corp. (NYSE: AR), Comstock Resources (NYSE: CRK), Extraction Oil & Gas Inc. (NASDAQ: XOG) and Oasis Petroleum Inc. (NASDAQ: OAS).
4. Exxon is not slowing down
- ExxonMobil (NYSE: XOM) gave a presentation on Thursday to investors, outlining its goals for the next few years.
- The oil giant said that production growth in the Permian would come in 10 percent lower than previously projected for the next two years, although it is still targeting 1 mb/d by 2024.
- The company also revised down slightly its medium-term spending plans, targeting $33 billion this year, which is at the low end of its range.
- But the aggressive growth plan remains intact - tweaked, but largely unchanged in its scope.
- Investors are souring on this kind of aggressive spending and growth strategy. Exxon was down 6 percent during midday trading on Thursday as some of these details were published.
- The loss was made worse by falling oil prices, but Exxon was the fourth-worst performer in the S&P 500 Energy Index during midday trading, offering evidence that the selloff was not just related to oil prices, but perhaps related to Exxon-specific problems.
- Exxon's shares are down nearly 30 percent since the start of the year, and its dividend yield recently jumped above 7 percent.
5. Chevron trades at a premium to Exxon
- ExxonMobil (NYSE: XOM) was not the only oil major to present to investors and analysts. Chevron (NYSE: CVX) also offered a look under the hood.
- Chevron said that it would dish out $75 to $80 billion in payouts to shareholders over the next five years, equivalent to more than 40 percent of the company's market cap.
- Its strategy is notably different than Exxon's - a focus on cash, not necessarily growth.
- Exxon will have to borrow or sell off assets in order to cover its dividend over the next few years, as it continues to spend heavily.
- The market is now rewarding Chevron. Chevron's shares trade at a premium over Exxon, a development that upends years of Exxon holding that premium.
6. Bond yields plunge
- Bond yields plunged as financial markets sold off equities and piled into safe haven assets.
- Mortgage rates hit a record low, as the yield on the 10-year Treasury fell below 1 percent.
- That followed the worst week for stocks since the global financial crisis. "For years it was 'buy the dip', 'buy the dip', 'buy the dip'," JJ Kinahan, chief market strategist at TD Ameritrade, told the Wall Street Journal. "It's very unsettling for people to see these kinds of moves everyday."
- That also came after the Federal Reserve surprised with a 50 basis point cut, the first cut of that size since the financial crisis. "You can cut rates to zero and the virus could continue to spread," said Amy Kong, chief investment officer at Barrett Asset Management, according to the WSJ. "They can't control the virus."
7. Coronavirus slowing in China, growing elsewhere
- The number of new coronavirus cases has dropped sharply in China since mid-February, evidence that the draconian quarantine policies helped slow the spread.
- But the number of cases everywhere else appears to be in its early stages.
- The impact is already causing havoc in the oil market, with forecasts for demand going into negative territory. "Our global oil demand growth forecasts now stands at only -0.15 mb/d in 2020nfrom 0.55 mb/d previously (and 1.1 mb/d before the coronavirus), its lowest annual growth rate since the financial crisis of 2008/09," Goldman Sachs wrote in a report.
- Goldman said that prices will rebound next year, with "lasting supply curtailments, accelerating demand growth and normalized inventories," helping to tighten up the market.