U.S. Oil Production Has Already Peaked

1. New fracked wells plunge

- The collapse of oil prices has already led to the removal of more than 150 rigs in just three weeks.
- This year, the number of newly completed wells coming online could fall to its lowest level in more than a decade at less than 9,000, according to Rystad Energy and Qz.com.
- Already, seven oil and gas companies have filed for bankruptcy in 2020, a figure that could balloon with WTI under $30 per barrel.
- U.S oil production fell by 600,000 bpd last week, evidence that the hit to output has already begun.

2. U.S. oil production already peaked

- The U.S. EIA predicted that oil production could decline by 0.5 mb/d in 2020 and potentially by 0.7 mb/d in 2021.
- But, obviously, everything depends on price. Standard Chartered estimates that the U.S. could lose 4 mb/d by the end of next year if oil prices remain at $30 per barrel.
- Either way, U.S. oil production has peaked, and it will be difficult to climb back to these levels ever again, given how much capital markets have soured on the industry.
- The EIA said that the U.S. will once again become a net petroleum importer later this year, ending a brief spell in which the U.S. was a net exporter (for the first time since 1973).

3. Permian discounts spike

- With demand dropping suddenly, refineries have had to curtail the production of refined products. That has led to oil backed up in pipelines and at the wellhead.
- Prices in Midland have dropped farther than the main WTI and Brent benchmarks because of the glut, with too much oil stuck behind a pipeline. The same is true in North Dakota.
- "Front-month Brent-WTI currently sits around $6/bbl, spot WTI-Midland spreads are about $4/bbl, and WTI-Bakken differentials are $12/bbl," Goldman Sachs noted in a report.
- Some places are hit harder than others. This week, Canada's WCS in Hardisty fell below $4 per barrel (a roughly $20 differential to WTI), while Bakken in Clearbrook, MN fell below $9 ($15 below WTI).

4. Refining margins go negative

- Refining margins have fallen sharply and dipped into negative territory in some cases as consumer demand vanishes.
- Global refiners are set to cut processing by 14 mb/d, according to a new report from S&P Global Platts Analytics.
- In the U.S., refining runs fell by 2.25 mb/d in early April. Midwest refiners are hit hard, with margins for WTI ex Cushing averaging negative $6.19 per barrel for the week ending on April 3, compared with negative 82 cents per barrel the week before.
- The report projects that another 678,000 bpd of refining capacity will go offline this week.

5. LNG's "Summer of Reckoning"

- Global LNG markets are facing a perfect storm - pandemic-related demand destruction, oversupply, and mild seasonal temperatures. "A large demand-destroying event like COVID-19 was the last thing the LNG market needed this year while already facing an overwhelming surplus," Bank of America Merrill Lynch wrote in a note.
- China averaged 40 percent annual LNG demand growth between 2016 and 2018, but demand only grew 12 percent last year. China is "unlikely to bail out the LNG market this year," with demand only set to increase 6 percent, BofA said.
- Asian spot prices have traded below $3/MMBtu for much of 2020 already.
- Surplus LNG since late 2018 has flowed to Europe, but gas storage in Europe hit record levels in 2019.
- The market is heading for trouble as more LNG will flow into European storage this summer. Even with coal-to-gas switching and lower imports from Russia, European gas storage could fill up by the third quarter, forcing LNG exporters to look elsewhere.
- Ultimately, that could lead to U.S. LNG export curtailments.

6. 4 mb/d of shut ins even after OPEC+ cuts

- OPEC+ agreed to take historic production cuts in order to reduce the supply overhang.
- Even assuming a cut of 10 mb/d, another 4 mb/d of shut-ins might be required, according to Goldman Sachs.
- The risk for prices is on the downside. "First and foremost, we don't believe that a 10 mb/d 'headline' production cut can shore up oil balances with lower prices still needed," Goldman Sachs wrote in a note. "Second, the sharp short-covering rally of the past week has already brought prices to the levels that we forecast in 3Q20 when the surplus would be ending, a still uncertain outcome."
- Rystad Energy said that demand destruction could reach 27 mb/d in April.

7. Gold prices rally from pandemic

- Stocks have declined by 20 percent this year, and certain commodities (oil) have cratered by even more, but gold prices have climbed by 9 percent.
- In March, Goldman Sachs argued that it was "time to buy the currency of last resort," arguing that gold could spike to $1,800 per troy ounce on "fear-driven investment demand."
- Gold performs well during times of currency, market, and commodity volatility. It also does not have fundamentals tied to the real economy - copper, for instance, fluctuates on industrial and construction demand. Gold acts as a safe haven.
- On Thursday, gold prices shot up after the U.S. Federal Reserve said that it would provide up to $2.3 trillion in loans for small businesses impacted by the pandemic. Gold rose more than 2 percent to over $1,720.