What Will $15 Oil Mean For Producers?

1. Gasoline demand plunges to 26-year low

- Unsurprisingly, U.S. gasoline demand has fallen sharply.

- With the U.S. economy in a form of hibernation, the impact is finally showing up in the data. The weekly EIA release shows a 13.8-million-barrel increase in crude inventories, gasoline stocks rose by 7.5 million, and refinery rates fell by 1 mb/d.

- Gasoline demand is down to 6.5 mb/d, a figure not seen since 1994.

- “This underlines our hypothesis that the harm caused to the US oil industry will outweigh the benefits for consumers,” Commerzbank wrote in a note.

2. Shale cuts growing

- More spending cuts are coming from the U.S. shale sector. Roughly 22 U.S. independents have cut spending by around $20 billion so far, an average of between 35 and 50 percent or more, according to Wood Mackenzie.

- “[C]ompanies today are far leaner than back then; and what we’ve seen so far may just be a taste of what’s to come,” WoodMac said.

- For the majors, share buybacks “will stop…Shell (US$4 billion), Chevron (US$5 billion), Total (US$2 billion) and Equinor (US$0.7 billion) have already shelved planned buyback programmes for 2020,” the consultancy added. The big question is whether the dividend payouts are going to get trimmed as well.

- Whiting Petroleum (NYSE: WLL) became the first major victim of the latest collapse in oil prices. The Denver-based driller declared bankruptcy this week, but not before executives took out $14.6 million in bonuses.

3. Oil storage running out

- With global oil demand set to decline by somewhere between 20 and 30 mb/d for a month or two at least, the world could see oil storage maxing out.

- Available global storage may only stand at 900 million barrels, according to Bank of America Merrill Lynch. That is divided up by 600 million barrels in tanks, 150 million barrels in strategic petroleum reserves, and another 90 million barrels in other caverns.

- “Refineries in many places are now losing money for every barrel they process, or they have no place to store their output of oil products,” said Bjarne Schieldrop, chief commodities analyst at SEB.

- As storage fills up, oil prices will head lower. Shut ins will grow, but not all unprofitable production goes offline immediately. “Indeed, given the cost of shutting down a well, a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas,” analysts at Goldman said in a research note.

4. Riyadh feels the pressure

- President Trump tweeted on Thursday that after speaking with Russia and Saudi Arabia, there would be a global production cut of between 10 and 15 mb/d, a truly staggering cut if it came to pass.

- At the time of this writing, there are significant questions about the veracity of the claim. Russia denied any agreement, while Saudi Arabia simply called for an emergency OPEC+ meeting and expressed a willingness to cut if others participated. It’s not clear that the U.S. would impose cuts on its domestic industry.

- Even if Trump’s claims are overblown, Saudi Arabia does feel intense fiscal pressure from low oil prices. Saudi Arabia needs oil prices at about $80 per barrel for its budget to breakeven.

- SEB says that Saudi Arabia’s strategy of high volume is necessary. “Saudi Arabia now needs to produce 13m bl/day and export 10-11m bl/day which, together with government spending cuts of 20-30%, will bring down its social break-even towards $50/bl,” Bjarne Schieldrop, chief commodities analyst at SEB. “Lifting Saudi Aramco’s production capacity to 13m bl/day is not a threat, it is a need.”

- But Riyadh also needs to balance fiscal pressure with its strategic relationship with the United States. The U.S. is applying pressure on Saudi to dial back on the price war. Riyadh’s decision to call for an emergency meeting suggests that the Saudi government wants to avoid a rift with its friends in Washington, even if the potential for a massive cut in output seems far-fetched.

5. China shows Pandemic rebound will be slow

- The Chinese experience with the coronavirus suggests that demand destruction will linger for many months, even if the Europe and the U.S. can overcome the worst of the coronavirus in the coming weeks.

- Port calls in China returned mostly to normal within 30 days for sea transport. Daily coal consumption, however, took a month longer, according to Bank of America Merrill Lynch. Coal demand is still 5 percent down, year-on-year.

- China’s road traffic is at 87 percent of normal rates, a reflection that demand may not come back to previous levels anytime soon. Beneath that figure, road traffic is very uneven depending on the region.

- Also, BofA also notes that while weekday traffic has rebounded, weekend traffic has “meaningfully lagged, suggesting that people are starting to get back to work, but are staying at home on weekends.”

- Jet fuel is the worst hit segment. Air travel in China is at 40 percent of normal levels. “China just shut down its borders to foreigners, an ominous sign for the global airline industry,” BofA said.

6. 15 mb/d oil uneconomic at $15

- “The global oil industry is experiencing a shock like no other in its history,” the IEA said this week.

- Roughly 5 mb/d of oil is already uneconomic at $25 Brent. “These operations are now losing money on every barrel they produce,” the IEA said.

- Much of the unprofitable oil is concentrated in North America.

- IHS Markit said about 10 mb/d could be shut in by June.

- The IEA figures suggest that 15 mb/d is uneconomic with oil at $15 per barrel, as the Axios chart depicts.

7. Permian production to decline

- While prevailing WTI and Brent prices put oil drillers in a crisis, the reality on the ground is even worse. Because of worsening pipeline, refinery and storage constraints, regional prices are even lower.

- WTI in Midland traded at about $10 per barrel, a $9.50-per-barrel discount under the broader WTI benchmark. WTI in Houston (MEH) traded at a $6 discount.

- Goldman Sachs says that U.S. oil production will fall by 1.4 mb/d by the second quarter of next year.

- The Permian lost 23 rigs last week and the culling is expected to continue.