- The U.S. rig count has fallen to record lows, plunging to 339 rigs on May 12. Since record-keeping began by Baker Hughes back in 1987, the rig count has never been this low.
- The rig count has fallen by 56 percent since March 17.
- The Permian, Eagle Ford and the Bakken have accounted for the bulk of the losses – 308 rigs, or 71 percent of the total decline.
- Big shifts in the rig count typically lead to production changes, although with an average lag of about 4 months. Shut-ins due to storage constraints have led to immediate oil supply losses, but the effects of the plunging rig count have yet to really show up in the data.
2. OPEC+ will struggle with compliance
- Oil prices have rocketed up into the $30s on the deep supply losses in the U.S. occurring alongside an uptick in demand.
- A long list of analysts have predicted a supply deficit occurring as soon as June or July, persisting for much of the rest of 2020.
- But any room for more production will likely come from OPEC+ countries, which just agreed to painful production cuts.
- “[I]t is always easier to bring back voluntary production cuts than involuntary ones, while there is also ample historical precedent for this,” JBC Energy wrote in a note.
- “Yup, we are forecasting major OPEC+ non-compliance to the tune of over 4 million b/d in 2021,” JBC said, referencing the current production…
1. Rig count hits record low
- The U.S. rig count has fallen to record lows, plunging to 339 rigs on May 12. Since record-keeping began by Baker Hughes back in 1987, the rig count has never been this low.
- The rig count has fallen by 56 percent since March 17.
- The Permian, Eagle Ford and the Bakken have accounted for the bulk of the losses – 308 rigs, or 71 percent of the total decline.
- Big shifts in the rig count typically lead to production changes, although with an average lag of about 4 months. Shut-ins due to storage constraints have led to immediate oil supply losses, but the effects of the plunging rig count have yet to really show up in the data.
2. OPEC+ will struggle with compliance
- Oil prices have rocketed up into the $30s on the deep supply losses in the U.S. occurring alongside an uptick in demand.
- A long list of analysts have predicted a supply deficit occurring as soon as June or July, persisting for much of the rest of 2020.
- But any room for more production will likely come from OPEC+ countries, which just agreed to painful production cuts.
- “[I]t is always easier to bring back voluntary production cuts than involuntary ones, while there is also ample historical precedent for this,” JBC Energy wrote in a note.
- “Yup, we are forecasting major OPEC+ non-compliance to the tune of over 4 million b/d in 2021,” JBC said, referencing the current production cut deal.
- The flip side is that OPEC+ could agree to relax cuts as soon as June when they hold their official meeting.
3. Natural gas liquid supply falling sharply
- Prices for natural gas liquids – ethane, propane, and butane – had a bad 2019 but have rallied since March. NGLs have done better on expectations of declining U.S. oil production, thereby curtailing NGL supply.
- “Producers have shut-in production and announced frac holidays, which has likely already resulted in a swift reduction in NGL supplies due to the high decline rates inherent in shale,” Bank of America Merrill Lynch wrote in a note. “If producers ceased bringing wells online in April, NGL production could fall 500k b/d by July.”
- Roughly 700,000 bpd of NGL supply could be lost before drilling activity stages a rebound in the second half of 2021, the bank said.
- At the same time, plastics demand has held up strongly.
4. Natural gas price volatility rising on supply cuts
- The volume of U.S. natural gas exiting through export terminals has declined sharply, an indication of more LNG cancellations, according to Goldman Sachs. Global LNG demand has softened substantially.
- However, natural gas prices may not change all that much from previous outlooks because the export declines could be offset by upstream production curtailments.
- Appalachian gas production averaged 30.7 Bcf/d in mid-May, down 1.2 Bcf/d from March levels.
- “Further, the last seven days show a 6 Bcf/d associated gas decline vs Mar20 levels, well above our 5.3 Bcf/d forecast for the month,” Goldman Sachs wrote in a note.
- “This illustrates the high degree of uncertainty that continues to impact summer 2020 gas balances, which has resulted in large swings in front-month gas prices, particularly since production shut-ins started to take place.”
5. Decline in upstream spending, leads to upcycle
- The oil market is entering a phase of “consolidation, capital efficiency and high barriers to entry,” which tighten up supply in the coming years, according to Goldman Sachs.
- Climate change concerns are contributing to lower investment in upstream projects. The number of climate-related shareholder resolutions has nearly doubled since 2011, with successful votes tripling.
- The industry’s capex commitments to new long-cycle projects has fallen by more than 60 percent over the last five years, compared to the previous five-year period. The projects that do move forward are much more weighted towards gas and brownfield development.
- Those trends are set to continue. However, under-investment in oil leads to a tighter market, and a much greater “call on OPEC” after a period of no non-OPEC growth, Goldman argues.
6. Copper prices rebound
- Copper fundamentals are improving as the Chinese economy has demonstrated a swift, if incomplete, rebound.
- At the same time, COVID-19 lockdown orders have negatively impacted supply. Peru, in particular, has seen supply disruptions – output has been disrupted at several large mines (Las Bambas, Cerro Verde and Antamina), according to Standard Chartered.
- The second quarter is expected to be the low point, with price gains in the third and fourth quarters expected, the bank said.
- “We expect copper prices to average USD 5,395/t in 2020 (USD 5,666/t prior) and USD 5,805/t in 2021 (USD5,988/t prior),” Standard Chartered said.
7. DUCs get renewed attention
- In mid-2019, as financial scrutiny on the unprofitable U.S. shale sector reached a new pitch, companies began to slow the pace of drilling.
- Instead, they resorted to completing drilled but uncompleted wells (DUCs), leading to an overall decline in the DUC backlog for the first time in years.
- But with a glut, completion activity slowed in recent months, so the drawdown in the DUC backlog slowed.
- The latest data shows the first increase in the DUC backlog – the number rose from 7,603 to 7,616 from March to April – since May 2019.
- “[T]here are significant drilled but uncompleted (DUC) wells across the major basins and producers are likely adding to this backlog during 2Q,” Bank of America Merrill Lynch said.
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well, Who says that production cut compliance is painful?
With over production oil prices went below zero, lessons learnt. So what is more painful? oil prices falling below zero or production cuts? Ths answer is obvious.
Now some 40-50% production cut can't be painful really.
It saves operational cost, holds the reserves for longer duration, producers receive much better prices for their produce although less volume.
My gut says that the production cut even without compliance will remain for several years 4,5 to almost 10 years from 2020.
2010 to 2020 we saw overproduction. Now its reverse cycle for next 10 years.
With over production oil prices went below zero, lessons learnt. So what is more painful? oil prices falling below zero or production cuts? Ths answer is obvious.
Now some 40-50% production cut can't be painful really.
It saves operational cost, holds the reserves for longer duration, producers receive much better prices for their produce although less volume.
My gut says that the production cut even without compliance will remain for several years 4,5 to almost 10 years from 2020.
2010 to 2020 we saw overproduction. Now its reverse cycle for next 10 years.