Editors: Tom Whipple, Steve Andrews
Quotes of the Week
“We’ve never seen a market quite like this. It’s not like oil has never seen a crash before but to have both a supply and demand shock, this is one for the books.”
Andrew Lebow, senior partner at Commodity Research Group.
“Because of the massive oversupply, [the purchases of shale oil for the US’s strategic reserve] will not be enough to balance the impact of the national emergency on fuel consumption.”
Per Magnus Nysveen, Rystad Energy
Graphics of the Week
1. Energy prices and production
2. Geopolitical instability
3. Climate change
4. The global economy and trade wars
5. Renewables and new technologies
1. Energy prices and production
Global oil consumption is in free-fall, heading for the biggest annual contraction in history, as more countries introduce unprecedented measures to fight the coronavirus outbreak. Travel bans, work-from-home, canceled vacations, and disrupted supply chains across the world all mean reduced demand for fuel. As societies respond to the virus, oil demand — already hurt by China’s shut down of parts of its economy — is falling further.
The growing fear among many traders is that oil demand, which averaged just over 100 million b/d in 2019, may contract by the most ever this year. It could quickly outstrip the almost 1 million b/d drop during the great recession in 2009 and even surpassing the 2.65 million b/d fall in 1980, when the world economy crashed after the second oil crisis.
Last week oil prices posted the biggest weekly plunge since 2008, with New York futures closing below $32 a barrel and Brent below $34. During the trading last week, WTI fell as low as $27 a barrel. On Monday, Brent crude plunged 20%, the largest one-day drop since the Gulf War in 1991. Oil prices now have fallen by almost 50 percent this year as the virus’s worsening impact on the global economy coincides with a massive supply shock. Saudi Arabia and Russia are in an all-out price war to gain a bigger market share.
Most analysts see oil prices staying in the $30s for the next few months; however, Goldman Sachs is talking about $20 oil, and a few pessimists are talking of a plunge into single digits.
With prices bouncing around in low $30s, high-cost oil producers are losing lots of money. Only the Russians, who benefit from a very weak ruble, say they can get along with $25-30 oil, using their sovereign wealth fund to keep the lights on. Other producers, especially the US shale oil drillers, are going to have to curtail drilling programs.
According to Rystad, just five shale drillers, including, Exxon, Chevron, and Occidental, can drill new wells at a profit at $31 per barrel. Some analysts have doubts that Exon and Chevron are doing as well as they claim as their financial reports are showing large losses from onshore operations in the US. Even the optimistic EIA expects US oil production to peak next month, and natural gas prices to continue to fall as warmer weather engulfs the country and LNG exports fall.
Moscow says it is going to increase production by 500,000 b/d. The Saudis, who are already shipping oil at a rumored $25 a barrel, are looking to increase production to 13 million b/d. The supply of oil will not be a problem for a while.
2. Geopolitical instability
The US’s confrontation with Iran heated up last week, with an exchange of attacks between an Iranian-backed militia and US forces in Iraq. Multiple rockets fell on Saturday morning inside Iraq’s Taji military base that houses U.S.-led coalition troops, wounding three US soldiers. A similar rocket attack occurred earlier in the week on Taji, killing two US and one British soldier. The first attack prompted Washington to launch retaliatory airstrikes on Thursday that killed six Iraqis.
Iraq condemned the US airstrikes on its territory, warning of dangerous consequences for what it called aggression against the nation’s regular armed forces. President Salih said repeated such violations could cause Iraq to unravel into a failed state and revive the Islamic State militant group. Washington defended the Thursday airstrikes, saying all five targets were legitimate and stored Iranian-supplied weapons used by the Kataib Hezbollah militia to attack the US-led coalition.
In the meantime, the situation in Iran continues to deteriorate with a combination of the rapidly spreading coronavirus and US sanctions resulting in great hardships. The country is suffering from the worst outbreak of the virus in the Middle East, with Tehran saying there are over 700 dead and 14,000 cases with even senior officials testing positive for the virus. There are concerns that the number of infections in Iran is much higher than the confirmed cases reported by the government. Some foreign specialists are saying the number infected may be much higher. Tehran has asked the International Monetary Fund for emergency funding to help it fight the coronavirus outbreak.
At least a quarter of Iran’s oil rigs are out of action as US sanctions strangle its oil production. The temporary shutdown of actively producing wells could damage those wells’ capacity to produce oil from older fields, which require continuous pumping to maintain pressure and output. That would make it difficult for Iran to raise production back to pre-sanction levels if tensions ever ease with the US.
Iraq will suffer more than most Middle East oil producers from the Saudi-led price war that is flooding the market with cheap crude. Baghdad is already struggling with political unrest and a leadership vacuum that will leave it with little money to manage its energy-dependent economy.
Last week, Saudi Arabia started an unprecedented battle to squeeze Russia and the US by slashing its crude selling prices with the biggest cut ever for some grades. It also announced plans to supply the market with 12.3 million b/d in April and increase its production capacity by 1 million b/d to 13 million. The Saudis are facing multiple threats as a renewed oil price slump threatens to hit not only the country’s revenues and economic diversification programs but also the already weak position of Saudi Crown Prince Mohammed bin Salman.
Libya’s state-owned National Oil Corporation has warned that the lack of funds to import sufficient refined products “to serve the basic needs of Libyans” could result in fuel shortages. The country’s crude production had fallen to 97,508 b/d as of March 11, less than a tenth of what it was producing before January 18, when the Libyan National Army, or LNA, orchestrated an oil port blockade.
3. Climate change
The world is falling short when it comes to curbing climate change, according to a new report released Tuesday by the World Meteorological Organization. The intergovernmental organization’s assessment evaluated a range of global climate indicators in 2019, including land temperatures, ocean temperatures, greenhouse gas emissions, sea-level rise, and melting ice. The report finds that most of these indicators are increasing, which means the planet is veering way off track in trying to control the pace of global warming.
Earth’s great ice sheets, Greenland and Antarctica, are now losing mass six times faster than they were in the 1990s thanks to warming conditions. A comprehensive review of satellite data acquired at both poles is unequivocal in its assessment of accelerating trends, say scientists. Between them, Greenland and Antarctica lost 6.4 trillion tons of ice in the period from 1992 to 2017. This was sufficient to push up global sea-levels by 17.8mm. Today, the ice sheets contribute about a third of all sea-level rise, whereas in the 1990s, their contribution was at about 5 percent.
Evidence is accumulating that global warming is disturbing water cycles in Asia in unpredictable ways. Snow cover is shrinking, glaciers are melting, the monsoon season is changing, and permafrost is at risk. These changes portend drastic consequences for a region whose ice fields hold the most abundant freshwater reserves outside the poles.
The Himalayas supply water to some 1.3 billion people in eight countries, and while the main nations at risk should be cooperating to mitigate the impact on hundreds of millions of people who depend on water from the mountains for survival, the opposite is happening. The rush to secure water resources adds to tensions in a region where the world’s two most populous countries, China and India, sit upriver from a host of smaller neighbors, and where India and Pakistan are avowed enemies. Water is becoming weaponized as a result.
China will modify the “environmental supervision” of companies to help the resumption of production disrupted by the coronavirus epidemic. This will give firms more time to rectify environmental problems. However, the government stressed it was not relaxing standards, just extending the time to implement them.
4. The global economy and trade wars
As the coronavirus spreads across the world, it is pointless to track the details of what is happening to the 7.4 billion of us as we struggle to stay away from the virus and continue to live with some semblance of normalcy. The global economy is contracting at an unprecedented pace as countries around the world implement full or partial shutdowns. Events are happening so fast that a snapshot of what is happening likely will be overtaken by events in a few days or even a few hours.
For now, the fundamental strategy for dealing with the virus is known as “flattening the curve.” The general idea is to slow the rate the coronavirus spreads so that medical services can keep up with the flood of new patients. Hopefully, new cases will be spread out of over several months, giving hospitals more time to accumulate resources necessary to help those requiring hospitalization. It is already apparent that lifestyles are going to change significantly in the months ahead as the world concentrates on necessities such as food, medicines, and a source of income to buy them.
Beijing is claiming that they have beaten back the domestic spread of the coronavirus by locking down tens of millions of people. They say now their only problem is infected people who contracted the disease outside China, and they are locking-up every new arrival for two weeks. This week we should have some numbers on what has happened to China’s economy in the past two months. So far, we only have glimpses of its state. How Beijing can bring hundreds of millions back to work with only a handful of new virus cases is a mystery that leaves one suspicious of government announcements.
Europe is rushing to shut down public places and is asking its people to stay home. Several countries are already implementing total or partial lockdowns. Air travel to and from Europe and domestic European air travel is grinding to a halt. As more people retreat to their homes, the demand for consumer services – non-essential retail, restaurants, entertainment, and discretionary travel — is disappearing, and with it, the need for oil.
Finding reliable sources of information is becoming more difficult. Governments ranging from Beijing to Washington have a vested interest in making the situation look as good as possible. The financial press is not going to stress the coming dangers to economic growth that seems to be enveloping us. For example, a survey of US economists a few days ago predicted a GDP contraction of only 0.1 to 2 percent this quarter – clearly optimistic considering that discretionary spending is plunging.
5. Renewables and new technologies
The European Commission has developed a new industrial strategy to help Europe’s industry lead the transition towards climate neutrality. The Strategy sets out a set of future actions, including a Clean Hydrogen Alliance to accelerate the decarbonization of industry and maintain industrial leadership. An EU official said clean hydrogen could become vital for energy heavy sectors such as aviation, transport, and other parts of heavy industry. Officials hope eventually to clear the hydrogen alliance for state aid as the battery alliance was.
Besides solar power, there is another way to harness the sun’s energy — photosynthesis. This is the process through which plants use energy from the sun to convert carbon dioxide and water into glucose. Scientists have been trying for years to replicate the process, with the result being electricity rather than glucose, and they have made some notable successes in the laboratory.
Earlier this year, the US Department of Energy announced funding of up to $100 million to be spread over five years for research into artificial photosynthesis.
“Sunlight is our most basic energy source, and the ability to generate fuels directly from sunlight has the potential to transform our energy economy and vastly enhance US energy security,” DoE’s Under Secretary for Science, Paul Dabbar, said in the news release.
NuScale Power has invested more than $900 million in the development of small modular reactor technology (SMR), which the company says represents the next generation of nuclear power plants. The company is working on a full-scale prototype and says it is on track to break ground on its first nuclear power plant — a 720-megawatt project for a utility in Idaho — within two years. The US Nuclear Regulatory Commission has just completed the fourth phase of a review of NuScale’s design, the first SMR certification the commission has reviewed. The company expects final approval by the end of 2020.
6. The Briefs (date of the article in the Peak Oil News is in parentheses)
The oil-price war between Saudi Arabia and Russia is set to unleash the biggest flood of crude ever seen, perhaps more than the world can even store. As producers ramp up shipments in a battle for dominance of global markets, and the coronavirus crushes demand, more than a billion extra barrels could flow into storage tanks. That could strain the available space and send oil prices crashing further, with brutal consequences for the petroleum industry and producing nations. (3/14)
Shares of Saudi Aramco slumped below their initial public offering price on Sunday for the first time since they began trading in December after OPEC’s pact with Russia to restrict oil supplies fell apart on Friday. (3/9)
Saudi Aramco has been given the go-ahead to launch the Jafurah shale gas field project, purportedly an extensive shale gas development. The official reason is that the project will boost domestic gas supply and end the burning of oil at its power generation plants. The core element that Saudi did not mention in its official comments on this issue is that the Kingdom will desperately need another primary energy source in the relatively near future because it has nowhere near the amount of oil remaining that it has stated since the early 1970s. (3/9)
Drilling of Lebanon’s first offshore well started on February 27th. All eyes are pinned on Byblos 1, waiting to find out whether it is a dry or a commercial well. It will take at least three or four months before there will be a conclusive result, however. What is critical to understand is that this is merely an exploration phase. (3/9)
Nigeria has about 50 cargoes of oil sitting offshore in international waters that have not found a destination, according to the Nigerian National Petroleum Corp. (3/14)
In Mexico, officials from Pemex claim that there will be no direct harm to the Mexican government’s budget after the oil price crash, despite the company’s bonds hitting a record low. Mexico’s Finance Minister Arturo Herrera said on Tuesday that a $1.37 billion hedge program completely covered 2020 national oil income following a steep drop in crude prices. (3/12)
In Canada, Alberta’s government could mandate further cuts to oil production if rising crude supplies and falling prices threaten the survival of drillers in the province. Crude-by-rail shipments are poised to collapse to about 100,000 barrels a day next month from 500,000 barrels a day forecast for March. (3/12)
Keystone pipeline update: A Canadian company said Wednesday it had started preliminary work along the route of the proposed Keystone XL oil sands pipeline through the US in anticipation of beginning construction next month. Opponents await a judge’s ruling on their request to block any work. A TC Energy spokeswoman said the Calgary-based company was moving equipment this week and will begin mowing and felling trees in areas along the pipeline’s 1,200-mile route within the next week or so. The work is planned in Montana, South Dakota, and Nebraska. (3/13)
The US oil rig count inched up by 1 to 683 while the gas rig count fell by two to 107, according to Baker Hughes’ weekly report. The combined rig count was at 234 fewer than this time last year. (3/14)
Oil producer budget cuts: Four more E&P producers have joined the lineup of oil companies that are slashing 2020 capital budgets and cutting back activity, as oil prices hover at low levels not seen for years. Noble Energy, Ovintiv (formerly Encana), and small-cap E&Ps QEP Resources and Bonanza Creek all have sharply cut capex, and QEP is even predicting cuts into 2021. (3/14)
Shale credit under stress. Roughly $110 billion in shale debt has fallen into the distressed territory, according to the Financial Times. That is 12 percent of the $936 billion in bonds issued by US oil and gas companies. Michael Anderson, a strategist at Citi, told the FT that there is a significant amount of default risk and that “A lot of bonds are in the ‘danger zone.’” (3/14)
Shale billionaire Harold Hamm intends to file a complaint with the US Department of Commerce against Saudi Arabia for “illegal” dumping of crude that sent oil prices into a tailspin earlier this week. (3/12)
Occidental Petroleum Corp. cut its dividend by 86 percent, its first dividend cut in 30 years as the oil producer opts to conserve cash to cover debt incurred in its $37 billion takeover of Anadarko Petroleum Corp. last year. (3/11)
Deal went bad: On August 8th, 2019, Occidental Petroleum completed the acquisition of Anadarko—a megadeal valued at $55 billion. That acquisition could well be looked back on as the worst oil deal of the decade. Since that day, the company’s stock price has crashed 85 percent and hit its lowest level since 2001. (3/12)
Oil stock drops hammer employees: Employees at US oil supermajors have lost $5 billion in savings since the end of 2018 as more than a third of these savings were in company stocks, which have been battered by oil price swings amid heightened market uncertainty. The five biggest US oil companies by market size—Exxon, Chevron, Conoco, EOG Resources, and Occidental Petroleum—held $44 billion in 401 (k) employee assets at end-2018, for around 66,000 employees (3/13)
Coal-fired power plants are retreating from the market in at least two significant ways. First, many plants are closing. Second: remaining plants are running much less often than before. Newly released figures from the EIA show that coal plants in the United States had a “capacity factor” of 47.5 percent in 2019. That’s down from a high just a decade ago of 67 percent. During that same timeframe, the number of coal plants went from about 580 to about 310. (3/11)
Wind and solar: As the cost of installing solar and wind power capacity has dropped, the scale and quantity of installations have risen. Solar power projects have become supersized, while the size of wind turbines has also exploded. In particular, the growth in the size of wind turbine blades over the last decades has transformed the wind power industry for the better. Since 2009, the average swept area of a turbine has doubled, thanks to 20 percent longer blades, allowing wind developers to produce more power without making turbines taller. (3/13)
A mammoth energy policy bill hit a roadblock in the Senate last week with a stalemate over amendments threatening to derail the legislation entirely. Lawmakers voted against closing debate on an updated version of the bill that included a package of noncontroversial changes forwarded by its sponsors, and a sign lawmakers are still eager to push for some of the 191 amendments that have been proposed for the bill. The path forward for the bill, which had been expected to pass as soon as Tuesday, is now unclear. (3/11)
Energy bill battle: It was supposed to be a bipartisan moment for the Senate. The energy legislation would boost efficiency and authorize billions of dollars to develop a wide range of clean energy options to limit greenhouse gas emissions that contribute to global warming. The measure also would enhance grid security and support efforts to capture and remove carbon emissions from coal and natural gas plants. The bill is widely supported in both parties but stalled this week amid a dispute over a proposed amendment to impose a 15-year phase-down of hydrofluorocarbons, or HFCs, that are used as coolants in refrigerators and air conditioners. (3/12)
Vehicles per person in the US reached a maximum in 2006, two years after a maximum for distance driven per person. That figure had increased by 18% since 1984, but then decreased by 5% by 2012. While vehicles per person have rebounded, they are still down from 2006 by 2.4%. In comparison, distance driven per person is down by 4.9% from its maximum.
Cobalt-free batteries: Tesla announced that it is in advanced talks to use cells from China’s Contemporary Amperex Technology Co Ltd (CATL) that contain no cobalt specifically for use in cars made at Tesla’s Shanghai plant. As a result of using CATL’s lithium-iron-phosphate (LFP) batteries, Tesla would be able to substantially lower the cost of those cars using the alternative battery technology, as cobalt is the most expensive component in traditional batteries. (3/13)
Tesla in EU: Until recently, European auto executives regarded Tesla with something like bemusement. The electric car upstart from California was burning cash, struggling with production problems, and hedge funds were betting it would fail. The car executives are not laughing anymore. Almost overnight, the Tesla Model 3 has become one of the best-selling cars in Europe. In December, only the Volkswagen Golf and Renault Clio sold more. (3/10)
Carbon market: The UK government is set to introduce legislation on a domestic carbon market and carbon taxation policy March 19th, according to government documents. The UK will stay in the EU Emissions Trading System until the end of 2020, with the government wanting a domestic carbon market in place by January 1st, 2021. (3/14)
Climate fight dilemma: The federal government is giving local officials nationwide a painful choice: Agree to use eminent domain to force people out of flood-prone homes or forfeit a shot at federal money they need to combat climate change. That choice, part of an effort by the Army Corps of Engineers to protect people from disasters, is facing officials from the Florida Keys to the New Jersey coast, including Miami, Charleston, SC, and Selma, Ala. (3/12)
Covid-19 reality lands: Much of life in America, and across the globe, has ground to a near halt in recent days as the coronavirus spreads, closing schools, thwarting travel, forcing employees to telework and shuttering beloved institutions. Authorities now believe the outbreak could fundamentally upend society for months. The sweeping, unprecedented shutdown of activity in the United States accelerated in seemingly no time, with the week starting like almost any other and ending in a way few can comprehend. (3/14)
Covid-19 scenarios: Officials at the US Centers for Disease Control and Prevention and epidemic experts from universities around the world conferred last month about what might happen if the new coronavirus gained a foothold in the United States. How many people might die? How many would be infected and need hospitalization? Translated into absolute numbers by independent experts using simple models of how viruses spread, the worst-case figures would be staggering if no actions were taken to slow transmission. (3/14)
China vs. US on Cov-19: On Wednesday, US national security advisor Robert O’Brien accused China of a slow response to the initial emergence of the coronavirus, saying this had probably cost the world two months when it could have been preparing for the outbreak. Asked about O’Brien’s comments, China’s Foreign Ministry spokesman Geng Shuang told a news conference in Beijing on Thursday that “immoral and irresponsible” remarks by certain officials would not help US epidemic efforts. (3/12)
Auto sales in China collapsed in February, as the coronavirus epidemic shut factories and dealerships, and forced consumers to stay home. Sales fell 79.1 percent last month from the same period a year earlier, with just 310,000 vehicles sold nationally. The decline was the Chinese industry’s worst monthly performance in modern times. (3/12)
Covid-19 to hit labor: The companies that feed America and provide basic staples are bracing for labor shortages as the pandemic intensifies, which could leave them without enough workers to manufacture, deliver and unpack groceries in stores in the coming months. (3/14)