Editors: Tom Whipple, Steve Andrews
Quotes of the Week
“The potential loss of demand in March-April may dwarf anything the world has ever seen, just when OPEC+ producers open the floodgates of new supply to the market.”
Bjoernar Tonhaugen of Rystad Energy.
“Even just a week ago, it was difficult to imagine how oil market conditions could become significantly weaker. However, over the past week, the restrictions placed on mobility by European and North American governments as part of their coronavirus response have significantly magnified the negative demand shock.”
Standard Chartered, a bank, wrote in a note
“We could see US shale at 1 million barrels a day lower at the end of the year easily if this current price holds.”
Elizabeth Murphy, ESAI Energy
Graphic 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
The market situation changed rapidly last week. On Monday, the oil traders were focused on the Saudi price war. By week’s end, however, the Saudi initiative had been overshadowed by the rapid spread of the coronavirus and its impact on oil demand. Rapidly falling demand resulted in a week of unprecedented volatility before oil prices settled on Friday at $22.43 in New York and $26.98 in London.
Front-month WTI briefly fell below $20 a barrel in the final minutes of trading, before bouncing back to settle down 11 percent on the day. Oil underwent its biggest weekly decline in almost three decades as concerns that the collapse of global fuel demand will deepen outweighed the prospects for talks between OPEC and Texas’s energy regulator.
Since dropping below $25 a barrel last week, an 18-year low, Brent crude has swung violently, with traders trying to assess the impact of OPEC+ output increases against falling demand due to measures to contain Covid-19. On four occasions in the past two weeks, Brent posted daily price swings of more than 10 percent.
At week’s end, the oil markets were awash with gloom as Citigroup laid out a pessimistic scenario in which WTI falls to $5 per barrel. Energy Aspects said Brent could fall to $10, and Mizuho Securities said some oil prices could even fall into negative territory. Discussion about how much the demand for oil will drop during this year is rampant in the financial press. “Demand destruction this year depends on how many countries follow an Italian-style lockdown. The drop in Italian oil consumption has been dramatic. If you extrapolate it to the rest of Europe and the US, then you can get as bearish as you like,” Giovanni Serio, head of research at Vitol, told Reuters on Friday.
Demand for oil is falling so rapidly — some traders say by 10 to 20 million b/d — that the OPEC+ production increases will be lost in the noise. Even President Trump’s plan to buy 30 million barrels for the US’s strategic reserve will be meaningless.
The US plans to send a negotiator to the Saudis to work out some way Riyadh would abandon its plans to increase oil production to 13 million b/d. One idea being talked about is for the Texas Railroad Commission, which can regulate oil production in the state, to negotiate a million b/d cut from the Saudis and Russians in return for a million b/d cut from Texas. This plan is somewhat bizarre as all indications are that US shale oil production is dropping like a brick with selling prices approaching $20 a barrel. Capital spending is being slashed, the rig count is falling, and oil worker layoffs are being announced.
The global oil and gas industry has slashed at least $31 billion from investment budgets, and more cuts are likely to come. Shale oil drillers in the US and oil-sands producers in Canada have been the quickest to announce belt-tightening efforts. However, major companies like Saudi Arabian Oil, France’s Total, and Russia’s Lukoil have also joined in, while Exxon and BP have hinted that reductions in capital expenditures are coming. In Asia, Latin America, and other Middle East countries, where most oil companies are state-owned, it’s not yet clear how producers will cope with the downturn.
2. Geopolitical instability
President Rouhani is trying to balance demands from some Iranians for mass quarantines with pushback from those who oppose restrictions on religious and economic activities. Iranian worshippers attempted to break into holy shrines and mosques last week, defying Iran’s leaders who are trying to bar access to religious sites as they struggle to stem a soaring death rate caused by the new coronavirus. The tension comes as some experts warn that fatalities in Iran from the Covid-19 virus could reach into the millions if public disregard for official guidelines continues.
As the pandemic spreads in Iran, interest in perpetuating international disputes seems to be waning a little. Washington and Tehran are so deeply involved in dealing with the domestic effects of the epidemic that, except for trading threatening rhetoric, neither seems to be taking direct action at the minute. In the tit for tat war between the US and Iran, which is taking place in Iraq, the Iranians are ahead at the minute, having killed two US soldiers in the most recent attack on a US installation in Iraq. So far, the US has only stepped up sanctions while the Pentagon is “looking at ways to respond to the attack.”
The Trump administration sent a harsh message to Iran that the US won’t ease its economic pressure campaign even as the coronavirus pandemic batters the country. The US said it has no plans to loosen restrictions that are choking off its oil revenues and isolating its economy. Iranian President Rouhani, on Friday, urged Americans to call on their government to lift sanctions as Iran fights the worst coronavirus outbreak in the Middle East.
On Saturday, Rouhani said that social distancing measures to combat the coronavirus outbreak in the country, including travel restrictions, will apply for only two to three weeks as he expects the crisis to ease by then.
The US army is pulling out of al-Qaim and two other critical military bases in Iraq in the coming weeks. The decision to leave three of its eight bases in Iraq is a sign the US is looking to dramatically reduce its footprint in the country. A ceremony will take place this week at al-Qaim, where the US will formally hand over equipment to the Iraqi army to help it ensure security in the area. It will end any US presence along the Iraqi side of the border with Syria.
Iraq’s President Salih designated a former provincial governor with American citizenship, Adnan al-Zurfi, as prime minister, drawing criticism from Iran’s allies in the country. This is the second attempt to form a government since Prime Minister Abdul-Mahdi resigned at the end of last year amid the biggest groundswell of opposition against the political establishment since the 2003 US invasion. More than 500 protesters have been killed by security forces, including state-affiliated militias since the demonstrations began last October.
Mr. Salih designated Mr. Zurfi to be prime minister after the Shiite political class failed to reach a consensus on a candidate. The Fateh coalition that represents many pro-Iranian factions denounced Mr. Salih’s move as “unconstitutional” and “provocative.”
Petronas, the Malaysian oil company that is managing Iraq’s Gharraf oil field, said on Wednesday that it was evacuating 80 Malaysian employees from the field due to the coronavirus situation.
Saudi Arabia will continue to supply a record 12.3 million b/d to the oil market in the coming months, per order from the energy ministry. The kingdom is aiming to significantly boost its crude oil exports to a record-breaking level, substantially more than its 10 million b/d in May. The Saudis, who launched a price war for market share with Russia after Moscow refused to back deeper cuts, will not only boost April exports from the current 7 million b/d but will also grow exports in May by another 250,000 b/d from April.
Saudi Aramco said its 2019 profit fell 21 percent to $88.2 billion due to lower oil prices and reduced output. It reduced 2020 estimated capital expenditures due to “current market conditions.” The drop from $111.1 billion in 2018 was “primarily due to lower crude oil prices and production volumes, coupled with declining refining and chemical margins.”
There are no reports of the coronavirus reaching Libya yet. However, fear of an outbreak has sparked panic-buying in food shops, and the government has closed restaurants and cafes at night, banned large crowds, and sealed its borders, all while fighting continues in the country’s civil war. At least 15 fighters and civilians have been killed in the latest battles near the capital. General Haftar’s bombardment of the capital continues.
Libya’s National Oil Corporation says that the eastern region of the country ‘illegally’ imported an aviation fuel shipment from the UAE in violation of UN and Libyan laws. A tanker came from the UAE to Benghazi and discharged around 10,000 tons of fuel.
3. Climate change
The silver lining to the coronavirus epidemic is that a slowing global economy is leading to a significant reduction in harmful carbon emissions. The downside is that cheaper fossil fuels and a massive reduction in economic activity are leading to slower investments in clean energy projects ranging from electric cars to solar and wind generator farms. How long this situation will last is unknown.
The conventional wisdom, as expressed by the IEA, is that the pandemic will be over shortly and that emissions will return to their inexorable growth. The IEA says that multi-billion-dollar investments in clean energy are likely to evaporate into thin air, with the current year set to record the first fall in solar energy growth in four decades.
Sales of electric vehicles are expected to come to a standstill for the first time in more than a decade. Even more worrying, the agency sees a dramatic reversal in the incremental shift away from coal-fired power plants that have lowered harmful emissions in recent years. However, many industrialized countries, particularly in the EU, are dedicated to reducing harmful emissions in the next decade. Advances in battery technology and large-scale production of electric vehicles could make them cheaper to own and operate.
4. The global economy and trade wars
The world’s economy underwent one of the most significant changes in history last week as the coronavirus pandemic spread rapidly to nearly every corner of the earth. Governments are going deeply into debt in an attempt to maintain some semblance of civilization as non-essential businesses everywhere are being closed down, throwing millions out of work.
It is becoming apparent that within a few weeks or even days, the world’s medical resources will be woefully insufficient to deal with the virus and that advanced medical treatment will not be available for an increasing portion of those afflicted by the virus.
While the official worldwide case count is about 350,000, the real number is almost certainly in the millions. In short, we are dealing with a modern version of the plagues that have beset the world several times in history, the most recent in the middle ages.
The virus and shutdowns of cities, states, regions, and countries are spreading so fast that it will be some time before we can tally up the economic damage the virus will cause. We cannot even say how long the epidemic will continue, with optimists and some government officials talking of weeks and other talking of months or years.
As this is written, about 25 percent of Americans are under some form of restriction to their homes or are unable to work at their usual jobs. This suggests that the US GDP is likely to be down by 25 percent or more during the next few months. The US Congress is working on plans to hand out some $2 trillion in borrowed money to mitigate the situation by providing enough for food and shelter. Lobbyists naturally are scurrying to get a disproportionate share of this money for their clients.
It Europe, the situation is even worse than in the US, with deaths increasing rapidly in Italy and Spain. Some fear that this situation will shortly repeat itself in the rest of Europe and the other advanced countries.
China, where the virus originated, is a significant anomaly in this story. Beijing runs a highly authoritarian state, and when it realized the danger this virus posed to its control on power, it imposed a draconian quarantine by shutting some 70+ million people in their homes. Also, the government shut down factories, intercity transport, and strictly controlled information about the virus. China’s economy took a tremendous hit.
For the past week, however, Beijing has been claiming that its quarantine has been successful and that no new domestically spread cases are being detected in the country. The only new cases they are seeing have originated from abroad, so Beijing is now sending all people returning from abroad into a two-week quarantine before allowing them to move about freely. Last week these imported cases jumped as tens of thousands of Chinese who were working or studying abroad returned home.
It will take some time to sort out what will happen to China’s economy over the next year or so. Even if China has brought the virus under control, the epidemic is just starting for most of its customers and raw material suppliers. Logistic routes are a mess. Chinese foreign business representatives are prohibited from visiting each other’s countries.
China only now is starting to let its population move freely on the streets. It may be possible to control the virus when most people are locked up, but will there be a resurgence of the virus when regular social intercourse resumes?
5. Renewables and new technologies
Given the unprecedented impact the coronavirus epidemic is having on the global economy, it seems unlikely that there will be much new investment in renewable energy sources for the immediate future. With fossil fuels, consumption and prices plunging, and the consequent reduction in carbon emissions, the growth in renewable usage is likely to slow for a while.
Observers are already ruminating as to whether the rush to electric cars will be grinding to a halt soon. While scientists continue to report progress in developing better batteries, hydrogen trucks, electrical recharging cables buried under highways, and even nuclear fusion, the implementation of these developments seems likely to be delayed for months, years, or perhaps decades.
6. The Briefs (date of the article in the Peak Oil News is in parentheses)
Oil exporters face revenue crash: The coronavirus pandemic and collapsing oil prices will slash the oil and gas revenues of vulnerable oil-reliant developing economies by up to 85 percent, the heads of OPEC and the International Energy Agency said in a joint statement as a growing number of countries are going into lockdown and oil demand is set to take an unprecedented hit. (3/18)
Russia vs. the Saudis: How long can the vicious oil-price war between Saudi Arabia and Russia last? If history is any guide, the battle will be a long one. Riyadh has waged four price wars, including the current one, over the last 35 years. All of them lasted at least a year, and prices plunged at least 50 percent. This time may be different, of course — there’s never been a demand shock so great at the same time as the supply shock. In past wars prices tumbled slowly, over a period of months. Riyadh’s new shock-and-awe tactics may just shorten the fight by inflicting so much pain, so quickly, that everyone has to come to the table sooner. (3/18)
Oil tanker prices soar: As Saudi Arabia and Russia began an all-out oil price war for market share, the shipping industry is going through a supertanker run and charter rates for very large crude carriers (VLCCs) are going through the roof. The Saudi promise to flood the market with oil and the price collapse it triggered have had traders scrambling to book VLCCs, each capable of transporting up to 2 million barrels of oil. One reason for the high supertanker demand was Saudi Arabia’s increased bookings of tankers. (3/17)
Tanker prices: The world currently has around 7.2 billion barrels of crude and products in storage, including 1.3 billion to 1.4 billion barrels currently onboard oil tankers at sea. Rystad Energy estimates that, on average, 76 percent of the world’s oil storage capacity is already full. The planned OPEC+ output hike has not only limited the workable available vessels but also caused a surge in tanker freight rates. The cost of renting a VLCC on the spot market has risen from about $20,000 per day last month to between $200,000 and $300,000, depending on destination. (3/21)
Storage topping up: The world could run out of oil storage capacity within months as the coronavirus pandemic crushes demand for fuel at the same time as the Saudi-Russia price war boosts supplies. For those renting out storage tanks or snapping up cheap oil with an eye on selling it at a profit later, this is a gift. But the oil industry’s capacity for storage is likely to be tested like never before, and prices may have to fall further to force the closure of oilfields. (3/18)
Shipping container shortage: Unloading holdups in China and delays on the return of vessels when the outbreak was largely limited to Asia have left shippers waiting for hundreds of thousands of containers to move their products. But as the disease goes global, the port of Fuzhou is starting to quarantine incoming ships from countries including the US for 14 days. (3/19)
Africa’s angst: The UN´s Economic Commission for Africa (ECA) estimates the coronavirus crisis could “seriously dent” Africa’s already stagnant growth, with oil exporting nations losing up to $65 billion in revenues, as crude oil prices continue to tumble. (3/21)
Guyana deal souring? Guyana is a poor former British sugar colony. Exxon Mobil is America’s largest oil company. Just as Exxon began to sell the first cargoes of Guyanese oil earlier this year, the company found its operations at the center of the country’s biggest political crisis in decades. After a bitterly contested — and still unresolved — election on March 2, many Guyanese are questioning whether the oil giant’s deal with their country, struck under the current government, is fair, and whether the oil proceeds will be equitably shared. (3/19)
Biofuels markets across the world are reeling from the oil crash this week, from Brazil to Malaysia. Bloomberg News points out that crude’s nosedive erases any chance of discretionary blending of palm oil with diesel, and drastically inflates the cost of government mandates. Biofuels, such as a blend of diesel with palm, need to be attractively priced compared with fossil fuels to encourage consumption, and that often requires subsidies. (3/20)
In Canada, the outright price of Western Canada’s benchmark heavy crude blend fell to $9.38/barrel, the lowest level on record Wednesday, underscoring the struggle many of the country’s producers will face to survive in the coming weeks and months. Canada’s heavy crude came at a discount of $13/b to the West Texas Intermediate (WTI) price. (3/19)
Canada is preparing a multibillion-dollar financial aid package for the oil and gas industry and could announce it as soon as next week. Among the measures discussed were access to more credit, especially for smaller businesses, and job creation for the workers who will likely be laid off amid the price crisis. Ottawa has prepared US$10.43 billion (C$15 billion) in financial aid for the industry, which, already struggling with low local crude prices, a pipeline shortage and a hostile investment environment has now been brought to its knees. (3/21)
The US oil rig count dropped by 19 rigs to 664, down 160 year-over-year, according to Baker Hughes’ data. Drillers only dropped one gas rig to 106 last week, compared to 192 year-over-year. The prolific Permian Basin took the brunt of the hit, with explorers idling 13 rigs there; at 405 rigs, that’s the lowest level since the nadir of the last crude-market slump in early 2016. (3/21)
In Alaska, ConocoPhillips will curtail 2020 in-state capital spending by $200 million and delay development drilling in the Kuparuk River and Alpine fields. The action will result in two drill rigs being laid off. Preliminary work on gravel roads and pads, already ongoing, will continue. (3/19)
Canadian imports: While US crude oil imports from OPEC and Mexico have slumped over the past decade and a half, crude imports from Canada—3.8 million barrels/day in 2019–have more than doubled since 2005 due to the price and refinery operational advantages. Last year, Canadian crude oil imports into the US accounted for more than half, or 56 percent, of total American crude imports. (3/20)
Negative oil prices? As prices barrel toward the lowest levels since the start of the century, negative prices have re-entered the realm of possibility. US oil futures just hit an 18-year low and that has a few traders and analysts wondering whether physical crude prices — in at least some parts of Canada and the shale patch — could actually drop below zero. It’s a rare but not impossible feat. Case in point: In the aftermath of the last major downturn four years ago, a North Dakota sour crude was briefly priced at negative 50 cents a barrel before being revised to a mere $1.50. (3/20)
Four bankrollers of fossil fuels: A new analysis from a coalition of environmental groups has found that four US banks are the world’s largest fossil fuel financers. The analysis estimates that J.P. Morgan Chase provided nearly $65 billion in fossil fuel financing last year, the largest out of any of the 35 banks listed in the report. It also found that other top banks included Citi, which provided an estimated $52 billion, Bank of America, which provided an estimated $48 billion and Wells Fargo, which provided an estimated $45 billion. (3/19)
Layoffs: Halliburton will institute a mandatory furlough for 3,500 employees in Houston, Texas, beginning next week amid falling oil prices. The furlough will begin Monday and will last up to 60 days. (3/19)
Deadly debt: Chesapeake Energy Corp, the oil and gas exploration and production company that helped spearhead the US shale revolution, has tapped debt restructuring advisers amid a rout in energy prices. The Oklahoma City-based company was struggling with its debt pile of roughly $9 billion even before an oil price war between Saudi Arabia and Russia and the fallout from the coronavirus pandemic contributed to driving its shares down more than 50 percent in the last three weeks. (3/17)
Airline bankruptcies coming: Sydney-based consultancy CAPA Centre for Aviation warned in a statement on Monday morning that most of the world’s airlines will be bankrupt by the end of May. Airline carriers are suspending routes for March, April, and May, and a full grounding of fleets has yet to be ruled out as flight restrictions have been placed across the world, spurring a collapse in demand, due to the Covid-19 pandemic. (3/19)
Grounding:Emirates, the world’s biggest long-haul airline, is looking at grounding the bulk of its 155 Airbus SE superjumbos as the coronavirus undermines global travel demand. (3/19)
Russia closes borders: Russian authorities on Monday banned foreign nationals from entering the country, shut state schools and limited public gatherings in Moscow in an effort to curb the spread of coronavirus. The ban on foreign nationals will be enforced from March 18 until May 1, though diplomats, airplane crew members and some other categories of people will be exempt. (3/17)
Truckers’ turmoil: Truck-stop restaurants in some states have shut dining rooms and switched to takeout service to comply with health orders aimed at controlling the spread of the virus. Some customers are asking drivers to stay in their trucks or switch from paper to electronic methods to document pickups and deliveries. Additionally, some trucking companies said their drivers are facing new restrictions at receiving docks if they have been in states considered coronavirus hot zones. (3/19)
IEA urges stimulus package support for clean energy: The executive director of the International Energy Agency said on Saturday that any major economic stimulus package should have a heavy focus on clean energy. He noted that while everyone is rightly focused on the pandemic, the threat of climate change continues to grow. The IEA has long received criticism from environmentalists for favoring fossil fuels, so the full-throated statement for what sounds like a version of the Green New Deal, at a time when the oil and gas industry is in a historical crisis, is remarkable. (3/18)
RE cheaper than coal: Renewable energy is not just better for the environment, it’s also becoming cheaper than coal for electricity generation in many parts of the world, according to a new report. Over 60 percent of current coal-fired power plants are producing electricity at a higher cost than new wind or solar installations would, according to findings of the Carbon Tracker Initiative, a self-described “not-for-profit financial think tank” focused on needling capital markets to adopt more climate-friendly policies. (3/18)
US coal carloads fell to a 10-year low of 55,542 in the week ended March 14, down 5.3 percent from a week earlier and 23 percent lower than the year-ago week. The latest week was down 31.6 percent from the five-year average. Coal carloads represented 12 percent of all the traffic on US railways. (3/19)
Japan’s offshore wind: Moves to unlock the full potential of Japan’s offshore wind industry are underway with the announcement of a task force set up to accelerate the sector’s development. Ambitions are to see the country’s renewables share increase from 16 percent to 24 percent by 2030 through a mixture of methods – hydropower being the most sizeable at 9.2 percent and wind coming in at 1.7 percent. Traditionally wind farms in Japan have been small-scale operations but this $894.4m project will see 33 turbines at the ports in Akita and Noshiro and be operational by the end of 2022. The two wind farms will have a combined capacity of 140MW and will comprise wind turbines installed on bottom-fixed foundations. (3/19)
Nuclear fusion’s new angle? A New Jersey scientist says he’s made a breakthrough that brings us one step closer to nuclear fusion. Researcher Michael Zarnstorff of the Max Planck-Princeton Research Center for Plasma Physics says that he may have found a solution to some of these challenges through the use of permanent magnets. That breakthrough has now led to an in-depth study with three other researchers to reach a permanent magnet design detailed in a paper that the researchers published in the science journal Nature on Friday. (3/19)
Credit crunch: Fears that the coronavirus will lead to widespread unemployment and a spike in consumer defaults have wiped more than two-thirds from the value of US credit card lenders and left executives contemplating cutting credit limits for some customers. (3/20)
China’s greenhouse gas emissions rose 2.6 percent in 2019 despite a fall in the share of coal in the country’s energy mix, driven by a rise in energy consumption and greater use of oil and gas, the research team Rhodium Group said Wednesday. Total greenhouse gas emissions in China last year were estimated at 13.92 billion tons of carbon dioxide equivalent. The annual growth rate is slightly lower than the 2010-2019 average of 3 percent and well below the average 9.2 percent increase over 2000-2009. (3/19)
Ozone-destroying chemicals once thought to be successfully banished are now making their way into the air again, slowing down our atmosphere’s recovery after those same chemicals effectively ripped a hole in it in the mid-20th century. Slowing things down still further: scientists haven’t been able to figure out where the chemicals are coming from. (3/19)