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The Oil Price War Has Only Just Begun

Oil Prices

Oil is climbing back up after falling over 25% on Sunday, but will the rally last? 

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-    U.S. natural gas production grew by 9.8 billion cubic feet per day (Bcf/d) in 2019, a 10 percent increase from a year earlier. 

-    The volume of gas exported rose sharply, to an average of 12.8 Bcf/d.

-    Appalachia remains the largest source of gas production at 32.1 Bcf/d, but the Permian gas output hit 28 Bcf/d last year, closing in on Appalachia.     

Market Movers

-    Cenovus Energy (NYSE: CVE) cut capex by 32 percent and will temporarily suspend its crude-by-rail program. It also said production would drop to 432,000-486,000 bpd, down from 472,000-496,000 bpd previously.

-    Ring Energy (NYSEMKT: REI) said it would cease drilling until oil prices stabilize.  

-    Ovintiv (NYSE: OVV) cratered by more than 70 percent on Monday, but rebounded by 33 percent on Tuesday. The oil company said it would cut spending to maintain free cash flow. 

Tuesday, March 10, 2020

After a historic rout, oil prices rebounded on Tuesday, but still traded in the mid-$30s. Saudi Arabia announced a major escalation in the price war. But hopes of economic stimulus, along with immediate announcements of cuts in the shale patch, helped stop the slide in oil prices, at least temporarily. 

Saudi Arabia to increase production to 12.3 mb/d. In April, Saudi Aramco said it would increase production to 12.3 mb/d. Output will be “300,000 barrels per day over the company’s maximum sustained capacity of 12 million bpd,” Aramco chief Amin Nasser said in a statement received by Reuters. The move marks a major escalation in the price war.

Related: Goldman Sachs: Prepare For $20 Oil

Russia could increase production by 0.5 mb/d. Russia’s energy minister said that it could increase production by 0.5 mb/d in the near future, but also said that the “door isn’t closed” for further talks. “If needed, we have various tools, including reducing and increasing production, and new agreements can be reached,” Russian energy minister Alexander Novak said.

Russia says it can weather the storm. Russia said that it can withstand oil prices at $25-$30 per barrel for 6-10 years, shrugging off the price war. Saudi Arabia also has deep pockets, but it has budgetary pressure and a fixed exchange rate that will require dipping into cash reserves. 

Saudi Arabia preparing for $12-$20 oil. Saudi Arabia is preparing budget exercises that account for the possible scenario that oil drops to between $12 and $20 per barrel. The government is even looking at the extreme scenario that oil drops below $10 per barrel.

Initial shale cutbacks announced. Spending cuts from a few shale companies came out immediately. Diamondback Energy (NASDAQ: FANG) said that it would reduce the number of rigs, reduce its spending and cut its active completion crews. Parsley Energy (NYSE: PE) made a similar announcement. “You’re going to see activity grind to a stop. At this level, this is survival: for some companies, they’ll be gasping for oxygen,” said Dan Yergin, vice chairman of IHS Markit.

Shale could decline by 1-2 mb/d. “A decline in US shale oil production of 1-2m bl/day from current total US oil production of 13.1m bl/day is natural to expect,” Bjarne Schieldrop, chief commodities analyst at SEB, said in a statement. “We now think that a last-minute deal between Russia and OPEC before the expiry of the current cuts at the end of March 2020 is very unlikely. Russia has probably firmly decided that now is the time to pull away the rug from under the feet of the shale oil producers, so now is the time for the second shale oil reset.”

Most shale wells unprofitable. At prevailing prices, nearly all new shale wells won’t make money. Only five companies have breakeven prices lower than the current oil price, according to Rystad Energy.

IEA: Oil demand to contract. The IEA said that oil demand will contract for the first time since 2009. The agency forecasted a demand loss of 90,000 bpd this year. 

Chevron may cut spending. Less than a week after it gave its annual investor presentation, Chevron (NYSE: CVX) said that it may consider spending cuts. It is the first oil major to announce a rethink following the latest price collapse. 


Investor exodus leave energy stocks in disarray. The 25 percent plunge in oil prices on Monday led to even steeper losses for energy stocks. Moody’s warned about a rise of defaults.

Leveraged loans come under stress. The sharp drop in both oil prices and broader equities put the spotlight on leveraged loans. Corporate debt has skyrocketed over the past decade, helped along by low interest rates. Much of the borrowing has occurred with riskier companies. Risky energy companies make up a significant slice of the $1.3 trillion in high-yield bonds. Barclays estimates that buyers of leveraged loans may only be able to recover 55 to 60 cents on the dollar, down from 67 cents historically.

E&Ps could cut capex by $100 billion. If oil prices stay at around $30 per barrel, total capex could plummet by $100 billion this year, and by another $150 billion in 2021, according to Rystad Energy. Related: Can’t Afford An EV? You’re Paying For It Anyway

LNG prices fall to record low. Spot LNG prices in Japan fell to $3.40/MMBtu, a record low since Japan started tracking data in 2014. JKM prices in Asia fell to $2.70/MMBtu last month.

China to ease restrictions in Hubei province. In a sign that the campaign to reduce the spread of the coronavirus, authorities in Hubei Province, the epicenter of the outbreak in China, are moving to ease restrictions after a significant drop in new infections. 

Tellurian slashes head count. LNG exporter Tellurian (NASDAQ: TELL) cut 40 percent of its workforce in a major restructuring. 

ExxonMobil to cut Permian activity slightly. ExxonMobil (NYSE: XOM) said last week that it would slightly reduce the pace of drilling in the Permian, although it still aims to produce 1 mb/d in the basin by 2024. However, those plans were unveiled before the latest meltdown in the market.

Middle East recession possible. The collapse of oil prices could trigger an economic recession in the Middle East. 

By Tom Kool for Oilprice.com 

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