The Global Rig Count Hits A Record Low

1. Global rig count hits record low

- The U.S. rig count has hit its lowest level in decades, but the global rig count is also at a record low.

- Offshore rig providers are going bankrupt at the fastest pace in years. Valaris (NYSE: VAL) filed for bankruptcy this week, seeking to restructure $7 billion in debt.

- "Offshore drilling is structurally damaged, and recovery is not imminent," Bernstein wrote in a note to investors.

- Valaris has a fleet of 55 rigs, but the company's CEO Tom Burke said that the offshore rig market will suffer from a prolonged contraction.

2. Wind and solar financing scales up

- Solar PV and onshore wind (and increasingly offshore wind, although from a small base) have attracted trillions of dollars in asset finance over the past decade. In 2019 alone, the sectors attracted $271.5 billion.

- The sectors are now perceived as low-risk by investors, flipping the script when compared to oil and gas. Poor (and volatile) returns from oil and gas has led to capital shifting into renewables.

- Bloomberg profiled a Texas rancher who wants to install over 700,000 solar panels on his land, who specifically noted that oil and gas appeared financially risky - the rancher expected to see declining royalties over time. Solar, by comparison, was a safer bet.

- Citigroup (NYSE: C) CEO Michael Corbat said this week that the bank should start walking away from corporate clients who do not commit to lowering their greenhouse gas emissions. "If we aren't aligned on the need to make this transition, then we must have the courage to walk away," he said.

3. Natural gas declines lead to price surge

- U.S. natural gas prices surged in the past few weeks, rising to $2.40/MMBtu by mid-week.

- The combination of shale gas production declines coinciding with a heat wave across much of the country, tightened up the market and pushed prices up.

- The latest EIA Drilling Productivity Report shows steep declines across most major shale gas basins. Appalachia is expected to lose 203 mcf/d in September. Anadarko loses 126 mcf/d, the Haynesville loses 62 mcf/d, Eagle Ford loses 56 mcf/d, and smaller losses are expected elsewhere.

- For roughly 9 months, natural gas traded below $2/MMBtu, a price at which most drillers cannot turn a profit. Now, prices are on the rise, which has led to a broad increase in share prices for pure play gas stocks.

- EQT's (NYSE: EQT) share price has surged more than 300% since February.

4. Bull market for metals

- Gold prices have hit records at $2,000 per troy ounce, although there appears to be resistance at that level.

- "The fact that it is taking somewhat longer can only be healthy in terms of its future price performance," Commerzbank wrote in a note.

- Noting the rebound in the broader S&P 500 since March, the bank said that the rally for gold has been the result of the same forces - "namely the unprecedented expansion of central bank liquidity coupled with a lack of alternative investments."

- That is also why gold and stocks have moved in concert in the past few months, rather than inversely as they would normally.

- But base metals are "headed in one direction only at present," Commerzbank said. That is, upwards. The trends are similar - monetary expansion, weaker dollar and greater risk appetite.

5. South America to see offshore rebound

- While the offshore oil market is in the doldrums, breakevens in South America are lower than in other parts of the globe, and South America could "lead the recovery," as Rystad Energy put it in a report.

- The firm expects offshore activity to rebound in 2021 with more than 3 mb/d of peak production estimated to be given the greenlight in Brazil and Guyana alone by 2025.

- Of that total, more than 80 percent of the capacity has breakeven prices less than $45 per barrel.

- Roughly 30 offshore oil projects could receive FIDs in South America over the next three years, requiring greenfield investment of around $50 billion.

- By the end of the decade, South America will be the largest offshore player in the world, with Brazil and Guyana leading the way. They will outpace other major offshore basins such as U.S. Gulf of Mexico, the North Sea and West Africa.

6. Oil stocks declining

- Confidence in OPEC+ compliance has helped boost oil market sentiment. So has the lack of U.S. shale response - rig counts remain depressed despite firmer pricing.

- Oil demand has also rebounded, although remains below pre-pandemic levels.

- Bank of America Merrill Lynch projects a crude oil supply/demand deficit in the fourth quarter on the order of 4.9 mb/d, along with a deficit of 1.7 mb/d in 1Q2021.

- Crude stocks remain at extraordinary levels, but are declining faster than expected.

- Aside from China and the U.S., the rest of the world has crude stocks back to the five-year average, the bank said.

- And because U.S. shale may not recover to pre-pandemic drilling levels, "the big drop in shale also means that US may need higher precautionary inventories," Bank of America said.

- "The bottom line is that the crude market is tighter than it appears, even if mobility in OECD economies remains subdued due to the coronavirus," Bank of America concluded.

7. U.S. gasoline demand still down

- U.S. gasoline demand bounced back relatively quickly after a historic decline in the second quarter.

- The increase in consumption helped boost oil markets, but the rebound has not come all the way back.

- In the most recent week of data, gasoline demand declined to 8.63 mb/d (August 14), down from 8.88 mb/d the week before.

- Demand is still 10 percent below year-ago levels. Demand has bounced around between 8.6 and 8.8 mb/d since June, but has stalled out.