U.S. Shale Struggles For Survival

1. U.S. shale won’t rebound until 2022?

- U.S. shale drilling activity will not recover until at least 2022, according to shale and oilfield service executives themselves.

- The Dallas Fed surveyed nearly 170 industry executives and found widespread pessimism regarding the health of the oil patch for the next few years.

- The same was true for their perception of oil demand. Only about 5 percent believe that global demand has already peaked, but more than 35 percent think demand won’t hit pre-pandemic levels until 2022.

- “I am a professional geologist and independent producer who has been involved in the oil and gas business for almost 50 years, and I have never experienced an environment such as what we are living through today,” one unnamed executive said.

2. Shale activity hits record low

- The business activity index, a broad measure of conditions in Texas and parts of New Mexico, fell from -50.9 in the first quarter to -66.1 in the second, which is the lowest reading on record since the Dallas Fed began recordkeeping four years ago.

- The capex index fell from -49.0 in the first quarter to -66.1 in the second, an indication that spending continued to contract.

- On average, respondents expect WTI to average $42.11 per barrel by the end of 2020, with responses ranging from $22 to $65.

- “This has been the fastest decline in my oil and gas career, and I expect the turnaround to be painfully slow,” one executive said.

3. Brent moved to backwardation, and back to contango

- The Brent futures curve tightened into a backwardation in mid-June, a situation in which spot prices trade at a premium to futures. That came after a long period of contango.

- But contango returned in recent days, reflecting fears of more market weakness. The spike of coronavirus cases in Texas, Florida, Arizona and California raises the prospect of more lockdowns, weaker oil demand and weaker economic growth.

- Globally, there are some negative signs as well. Traders have taken hope in China’s strong rebound, but Covid-19 continues to spread in India. Other parts of Asia are not following in China’s footsteps on a more or less V-shaped recovery.

- The IMF downgraded its assessment for global economic growth, predicting a deeper recession than it did two months ago.

- “If the economy doesn’t pick up, that will become a drag on crude oil demand just when OPEC+ has to make a decision about what to do next,” said Ole Hansen, head of commodities strategy at Saxo Bank.

4. Covid drives down solar costs

- The cost of U.S. solar is declining faster because of the pandemic, according to a new report from Wood Mackenzie.

- Residential solar systems are expected to fall by 17 percent between 2020 and 2025, a larger decrease than the 14 percent predicted before the coronavirus.

- Oversupply of modules has led to price cuts. “Module cost reduction will be the most significant factor impacting C&I and utility system costs as a result of the pandemic. Not only are module manufacturers facing reduced demand and subsequently lowering margins to stay competitive, but they are also looking at a reduction in supply chain component costs, leading to further module price declines,” Molly Cox, Wood Mackenzie Research Analyst, said in a statement.

- Meanwhile, even as growth takes a hit from the pandemic, renewable energy holds up better than gas and coal in electricity markets. Zero fuel costs means that renewables get dispatched first.

5. Coronavirus in populous states

- The number of coronavirus cases broke new records across some big states, with significant ramifications for gasoline demand.

- California, Texas and Florida accounted for 43 percent of new coronavirus cases on June 24, and they are the largest consumers of gasoline. Nine of the top-20 gasoline consuming states are seeing rising cases of Covid-19, according to Standard Chartered.

- “We find the concentration of new cases in key gasoline-consuming states at odds with the bullish tone of much recent market commentary based on a rapid V-shaped recovery in gasoline demand,” the investment bank wrote in a note.

- “There is a recovery in progress but it is off a very low base and we see no evidence that it is V-shaped.”

6. LNG cancellations, U.S. natural gas prices hit new low

- U.S. natural gas prices fell to a 25-year low on Thursday, with Henry Hub down below $1.50/MMBtu.

- By the end of the summer, LNG cancellations “will have added more than 760 Bcf to US gas storage,” Goldman Sachs wrote in a report, “which is 50% larger than what we would expect a 1-standard-deviation colder-than-average winter to remove from storage.”

- There are limits to how much utilities can lean on coal-to-gas switching for power burn, which is already happening. “As a result we see US gas production shut-ins, which we had been discussing as a risk, as now part of our base case for this summer.”

- The bank cut its Nymex gas forecast price for October 2020 to $1.40/MMBtu, down from $1.75/MMBtu previously.

- For the next several months, the window for exporting LNG from the U.S. is closed, the bank said.

7. Shale burns through $342 billion in 10 years

- The U.S. shale industry burned through more than $300 billion since its inception, and “peaked without ever making money,” according to a new report from Deloitte.

- The industry also impaired $450 billion of invested capital, and more than 190 U.S. oil and gas companies fell into bankruptcy.

- Roughly a third of U.S. shale companies are “technically insolvent” at $35 WTI, and potentially up to half of them are “superfluous” and offer little to no value to would-be buyers.

- Shale won’t disappear, but the outlook is not great. “The oil industry is currently experiencing a “great compression” in which companies’ room to maneuver is restricted by low commodity prices, reduced demand, capital constraints, debt loads, and health impacts of COVID-19,” Deloitte wrote.