The Shale Daily Update – 5.22.2020

Goldman Sachs is projecting the fallout from COVID-19 will return the global supply equation for crude oil “Back to the 90s“.
Shale gas drilling with sunrise in the province of Lublin, Poland.

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Goldman Sachs is projecting that the fallout from the COVID-19 pandemic will return the global supply equation for crude oil “Back to the 90s“, with OPEC back in the driver’s seat and supply growth outside of that cartel stagnating.

In its new report titled “Top Projects 2020,” Goldman predicts that “Consolidation, capital efficiency and higher barriers to entry dominate the search for a new equilibrium in the oil market,” a prospect that it says will lead to lower levels of overall U.S. production and stagnation in the various shale plays around the country. It’s an interesting thesis that frankly makes a good deal of logical sense.

So much will of course depend on the OPEC+ agreement holding together, with its artificial limitations on production and exports by the participating countries.

On our radio program, “In The Oil Patch,” last week, Kym Bolado and I were able to interview Fahad Nazer, the press spokesman for the Embassy of the Kingdom Saudi Arabia in Washington, DC. During that interview, Mr. Nazer made it clear that the KSA and other participating nations in that agreement are focused on rebalancing the market and moving oil prices back up to healthier levels.

With firms like Rystad Energy and Wood MacKenzie projecting crude demand to recover rapidly through the remainder of 2020 and into next year, it would not be at all surprising to see global prices back in the $50 range by the end of the year.

If Goldman is correct in its belief that U.S. production will recover slowly – which seems likely to be the case, given all the layoffs and idled rigs that have taken place this year – the result of that would likely be far less tension between the OPEC+ countries and U.S. shale, given a less intense competition for global market share. When you look back at the reasons why the original OPEC+ deal fell apart in early March, the main reason was the fact that the U.S. industry increased its overall production by well over 3 million barrels of oil per day in 2018 and 2019, forcing the OPEC+ nations to continuously drop their own production in order to keep prices up.

The reality is that the U.S. is likely to see its overall crude production drop during 2020 by at least 4 million barrels of oil per day. In addition to what will become a fairly slow process of reactivating the rigs and frac spreads that have been idled over the last 2 months, the U.S. industry faces an increasingly constrained access to capital markets.

The now-retired CEO of a company I once worked for reminded me this week of another factor few are factoring into their projections right now. That involves the reality that “a number of the wells that have been shut in will never again produce. Most operators shut in the most costly production first. That tends to be the older wells with the highest water cut. So when you try to bring those wells back on-line, many of them never return to production.”

All of this means that any recovery of U.S. oil production is likely to be much slower than many are currently projecting, regardless of how rapidly prices manage to recover. Thus, Goldman’s prediction of a return the 90s appears to make sense.

In Other News:

The price for WTI dropped by 5% overnight due to concerns about China’s economic growth. Here’s an excerpt from a CNBC story:

Oil prices slumped on Friday after China’s decision to omit an economic growth target for 2020 renewed concerns that the fallout from the coronavirus pandemic will continue to depress fuel demand in the world’s second-largest oil user.

Brent crude fell $1.70, or 4.7%, to $34.36 a barrel, after gaining nearly 1% on Thursday. West Texas Intermediate crude dropped by $1.91, or 5.6%, to $32.01 a barrel, having gained more than 1% in the last session.

China’s National People’s Congress (NPC) kicked off a week-long meeting on Friday with the government saying it omitted the 2020 target, while pledging to issue 1 trillion yuan ($140 billion) of special treasury bonds to support companies and regions hit by the pandemic.

The BBC has an interesting report about the ongoing impacts to the U.S. oil and gas industry from the COVID-19 pandemic.

Well this was unexpected. Sergio Chapa reports in the Houston Chronicle that, thanks to the COVID-19 induced oil bust, the Marcellus Shale has displaced the Permian Basin as the location of the most U.S. frac crews. Unreal.

The American Energy Alliance weighs in against President Trump taking action to levy tariffs on oil imports.

Good piece here discussion the fact that domestic crude storage stockpiles now appear to have stabilized. Excerpt:

U.S. petroleum inventories show signs of stabilizing as domestic crude production and imports slow while refinery processing gradually increases from last month’s crisis lows.

Excess inventories are clearing from the crude side first in response to output cuts, while a reduction in refined fuel stocks will take longer as consumption is slower to return. Total inventories of crude and products, excluding the strategic petroleum reserve, rose by another 5 million barrels last week, taking the cumulative increase to 142 million barrels since March 20.

Total inventories have climbed to a record 1.40 billion barrels, but the rate of increase has decelerated progressively since the second week of April (tmsnrt.rs/3bPFr2h). Crude inventories actually fell by 5 million barrels last week, the second weekly decline in a row, a marked turnaround from the previous rise of 78 million barrels since March 20.

That’s all for today.

 

 

 

 

 

 

 

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