Released March 11, 2020 | SUGAR LAND
en
Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Crude oil prices recovered some of their recent losses on Tuesday, but the factors driving that collapse--an over-supplied market, weak or no near-term global demand growth and a price war triggered by Saudi Arabia--suggest matters could get worse before they better for U.S. Oil & Gas producers.
The global spread of the COVID-19 coronavirus caused the International Energy Agency (IEA) (Paris, France) to cut its first-quarter demand projection by 2.5 million barrels per day (BBL/d). Nearly three-quarters of that decline, 1.8 million BBL/d, is attributable to China, the agency said in its recently released Oil Market Report for March. For the full year, IEA is expecting a 90,000-BBL/d decline in year-over-year global demand. Demand has not declined outright since 2009, the agency said.
"In the past few weeks," IEA noted, "COVID-19 has gone from being a Chinese health crisis to a global health emergency. While China has taken strong measures in response to the outbreak, the situation appears to be worsening around the world, with (over 100) countries reporting cases. The impact on the world economy is becoming more apparent, and growth estimates for this year are being downgraded. Earlier this month, the OECD lowered its global economic growth estimate for 2020 by 0.5% to 2.4%, a revision that is factored in to our latest projections."
Global crude-oil production has exceeded demand for several quarters, as continued production growth from non-OPEC countries, mainly the U.S., has more than offset production cuts by OPEC+ nations. Weak global demand growth meant the global oil market was oversupplied before COVID-19 broke out. COVID-19 has further depressed demand as factories closed and air travel has declined.
As the impact of COVID-19 on global demand was becoming clear, Saudi Arabia tried to engineer a production cut of around 1 million BBL/d, to remove product from the market. The kingdom reportedly was willing to make additional production cuts on top of that. But last Friday afternoon, after the stock market closed, Russia rejected the proposed cut. Over the weekend, Saudi Arabia vowed to increase production.
When markets opened Monday, West Texas Intermediate (WTI) prices fell about 25%, or roughly $9 per barrel, the biggest one-day decline since the Gulf War of 1991. WTI prices rose about 11% on Tuesday, helped in part by the potential for U.S. tax cuts or a targeted economic stimulus from the government.
The U.S. is producing about 13.1 million BBL/d, making it the world's largest producer. Saudi Arabia is producing about 9.7 million BBL/d, and has the capacity to produce as much as 12.3 million BBL/d. Russia's oil minister promised to boost production as well.
The Saudi move to increase production, though triggered by Russia's unwillingness to cut production, would have collateral damage among U.S. shale producers, who have significantly higher costs than the Middle Eastern kingdom. In a world of flat to modestly declining demand, Saudi Arabia can operate profitably even if oil stays under $40 per barrel. U.S. producers cannot.
Falling crude oil prices, while a boon to refiners and drivers, couldn't come at a worse time for producers, many of whom already were under water before prices collapsed. Investors, stung by years of drillers being unprofitable even when oil sold for $50 to $75 per barrel, have been pressuring drillers to live within their means by dialing back exploration activities, selling assets and returning free cash flow to investors.
Among exploration & production companies, Chapter 11 bankruptcies have grown sharply in recent years, according to a tally maintained by the Dallas law firm of Haynes & Boone LLP: More than 200 producers declared bankruptcy in the five-year period between 2015 and 2019.
That number seems likely to grow. Banks are going through their spring loan reviews with energy companies. The yields of some energy-company bonds have shot up as investors have sold them, doubtful they would get repaid.
As the world was awash with crude oil, the Department of Energy (Washington, D.C.) on Tuesday postponed a planned draw of up to 12 million barrels of oil from the Strategic Petroleum Reserve.
Marathon Oil Corporation (NYSE:MRO) (Houston, Texas) on Tuesday said it would slash drilling activity and capital expenditures (capex) this year, to reflect market conditions. Capex would be cut about 21%, or $500 million, to about $1.9 billion for the year, the company said. Marathon's full-year 2019 capex was about $2.5 billion.
"In response to the recent commodity price volatility from simultaneous supply and demand shocks, we're taking swift and decisive action to defend our cash flow generation, protect our balance sheet, and fund our dividend," Marathon Oil Chief Executive Officer Lee Tillman said in a statement.
Before the oil price rout, Exxon Mobil Corporation (NYSE:XOM) (Irving, Texas) said it would throttle back its operations in the Permian Basin, a recognition of outbound logistical bottlenecks as well as slowing demand growth for oil.
Occidental Petroleum Corporation (NYSE:OXY) (Los Angeles, California) said it would cut 2020 capex 32%, to about $3.6 billion, and lower its quarterly dividend 86%. This was the first time the producer has cut its dividend in 32 years. Last year, Occidental acquired Anadarko Petroleum Corporation (The Woodlands, Texas), and even before the price collapse, it was paring back exploration activities to free up cash to repay some of the debt.
Reuters reported that smaller producers, including Diamondback Energy Incorporated (NASDAQ:FANG) (Midland, Texas), Parsley Energy Incorporated (NYSE:PE) (Austin, Texas) and California Resources Corporation (NYSE:CRC) (Santa Clarita, California) also will reduce capex.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
The global spread of the COVID-19 coronavirus caused the International Energy Agency (IEA) (Paris, France) to cut its first-quarter demand projection by 2.5 million barrels per day (BBL/d). Nearly three-quarters of that decline, 1.8 million BBL/d, is attributable to China, the agency said in its recently released Oil Market Report for March. For the full year, IEA is expecting a 90,000-BBL/d decline in year-over-year global demand. Demand has not declined outright since 2009, the agency said.
"In the past few weeks," IEA noted, "COVID-19 has gone from being a Chinese health crisis to a global health emergency. While China has taken strong measures in response to the outbreak, the situation appears to be worsening around the world, with (over 100) countries reporting cases. The impact on the world economy is becoming more apparent, and growth estimates for this year are being downgraded. Earlier this month, the OECD lowered its global economic growth estimate for 2020 by 0.5% to 2.4%, a revision that is factored in to our latest projections."
Global crude-oil production has exceeded demand for several quarters, as continued production growth from non-OPEC countries, mainly the U.S., has more than offset production cuts by OPEC+ nations. Weak global demand growth meant the global oil market was oversupplied before COVID-19 broke out. COVID-19 has further depressed demand as factories closed and air travel has declined.
As the impact of COVID-19 on global demand was becoming clear, Saudi Arabia tried to engineer a production cut of around 1 million BBL/d, to remove product from the market. The kingdom reportedly was willing to make additional production cuts on top of that. But last Friday afternoon, after the stock market closed, Russia rejected the proposed cut. Over the weekend, Saudi Arabia vowed to increase production.
When markets opened Monday, West Texas Intermediate (WTI) prices fell about 25%, or roughly $9 per barrel, the biggest one-day decline since the Gulf War of 1991. WTI prices rose about 11% on Tuesday, helped in part by the potential for U.S. tax cuts or a targeted economic stimulus from the government.
The U.S. is producing about 13.1 million BBL/d, making it the world's largest producer. Saudi Arabia is producing about 9.7 million BBL/d, and has the capacity to produce as much as 12.3 million BBL/d. Russia's oil minister promised to boost production as well.
The Saudi move to increase production, though triggered by Russia's unwillingness to cut production, would have collateral damage among U.S. shale producers, who have significantly higher costs than the Middle Eastern kingdom. In a world of flat to modestly declining demand, Saudi Arabia can operate profitably even if oil stays under $40 per barrel. U.S. producers cannot.
Falling crude oil prices, while a boon to refiners and drivers, couldn't come at a worse time for producers, many of whom already were under water before prices collapsed. Investors, stung by years of drillers being unprofitable even when oil sold for $50 to $75 per barrel, have been pressuring drillers to live within their means by dialing back exploration activities, selling assets and returning free cash flow to investors.
Among exploration & production companies, Chapter 11 bankruptcies have grown sharply in recent years, according to a tally maintained by the Dallas law firm of Haynes & Boone LLP: More than 200 producers declared bankruptcy in the five-year period between 2015 and 2019.
That number seems likely to grow. Banks are going through their spring loan reviews with energy companies. The yields of some energy-company bonds have shot up as investors have sold them, doubtful they would get repaid.
As the world was awash with crude oil, the Department of Energy (Washington, D.C.) on Tuesday postponed a planned draw of up to 12 million barrels of oil from the Strategic Petroleum Reserve.
Marathon Oil Corporation (NYSE:MRO) (Houston, Texas) on Tuesday said it would slash drilling activity and capital expenditures (capex) this year, to reflect market conditions. Capex would be cut about 21%, or $500 million, to about $1.9 billion for the year, the company said. Marathon's full-year 2019 capex was about $2.5 billion.
"In response to the recent commodity price volatility from simultaneous supply and demand shocks, we're taking swift and decisive action to defend our cash flow generation, protect our balance sheet, and fund our dividend," Marathon Oil Chief Executive Officer Lee Tillman said in a statement.
Before the oil price rout, Exxon Mobil Corporation (NYSE:XOM) (Irving, Texas) said it would throttle back its operations in the Permian Basin, a recognition of outbound logistical bottlenecks as well as slowing demand growth for oil.
Occidental Petroleum Corporation (NYSE:OXY) (Los Angeles, California) said it would cut 2020 capex 32%, to about $3.6 billion, and lower its quarterly dividend 86%. This was the first time the producer has cut its dividend in 32 years. Last year, Occidental acquired Anadarko Petroleum Corporation (The Woodlands, Texas), and even before the price collapse, it was paring back exploration activities to free up cash to repay some of the debt.
Reuters reported that smaller producers, including Diamondback Energy Incorporated (NASDAQ:FANG) (Midland, Texas), Parsley Energy Incorporated (NYSE:PE) (Austin, Texas) and California Resources Corporation (NYSE:CRC) (Santa Clarita, California) also will reduce capex.
Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com.
