IEA chief says low oil prices will take demand beyond pre-crisis highs

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Category : News , Oil Prices

By Javier Blas on 5/25/2020

LONDON (Bloomberg) –Global oil consumption hasn’t peaked, the head of the International Energy Agency warned, throwing cold water on hopes the coronavirus will cap demand and reduce climate-changing emissions.

“In the absence of strong government policies, a sustained economic recovery and low oil prices are likely to take global oil demand back to where it was, and beyond,” Fatih Birol said in an interview.

Fatih Birol, executive director of the International Energy Agency (IAE), gestures as he speaks during a Bloomberg Television interview on the opening day of the World Economic Forum (WEF) in Davos, Switzerland, on Tuesday, Jan. 21, 2020. World leaders, influential executives, bankers and policy makers attend the 50th annual meeting of the World Economic Forum in Davos from Jan. 21 – 24.

The world consumed last year nearly 100 million barrels a day of oil, and some in the energy industry believe that could mark the peak for global demand. Their hypothesis is that the coronavirus outbreak will trigger changes, like widespread working-from-home and less overseas travel, reducing consumption permanently.

“Could it be peak oil? Possibly. Possibly. I would not write that off,” the head of British oil major BP Plc, Bernard Looney, told the Financial Times.

If true, that would have huge implications for climate change as burning less oil would permanently reduce greenhouse emissions, easing the way to meet the goals of the Paris climate agreement. But Birol warned governments that the coronavirus will only reduce oil demand briefly, with consumption dipping in 2020 to about 91 million barrels a day, before rebounding in 2021 and beyond.

“Behavioral changes in response to the pandemic are visible but not all of them are negative for oil use. People are working from home more, but when they do travel, they are more likely to be in cars than public transport,” he told Bloomberg News from Paris. “Videoconferencing will not solve our energy and climate challenges, good government policies might.”

Birol is urging governments to use their economic recovery packages to fight climate change, spending on green energy to help to achieve the goals set in the 2016 Paris accord.

The more ambitious target set under the Paris climate agreement — limiting the temperature increase to 1.5 degrees Celsius — will require annual global emissions to be reduced by about half by 2030 and to hit net-zero around the middle of the century. Without deep structural changes, emissions are expected to rise again when economies recover.

“If there’s a strong economic recovery, American business consultants using Zoom will not compensate for 150 million new urban residents in India and Africa traveling, working in factories and buying products transported by trucks,” Birol said.

Birol drew parallels with the 2008-09 crisis, when oil demand also suffered a major annual drop, before consumption increased again. The economic recovery packages didn’t focus back then on green energy and savings, missing an opportunity to tackle the challenge of climate change.

The IEA, which advises the world’s richest countries on oil policy, is sticking to its view that global oil demand will continue to increase over the next decade or so, before reaching a plateau around 2030. In a report published in November 2019, the agency said global petroleum consumption was likely to reach about 105 million barrels a day by 2030 and about 106 million by 2040.

In its 2019 long-term analysis, the IEA assumed significant oil savings from the sale of new vehicles over the next two decades. The use of more fuel-efficient engines would knock out 9 million barrels a day of demand, while the growth of electric cars would displace about 4 million a day. But the current economic crisis is likely to reduce car sales for a while, keeping less efficient clunkers on the road.

“Fewer car sales means older cars stay on the road,” he said.

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Swift production declines may keep shale operators on oil rebound’s sidelines

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Category : News , Oil Prices

By Rachel Adams-Heard, Kevin Crowley and David Wethe on 5/24/2020

HOUSTON (Bloomberg) –Oil prices have surged more than 75% in the U.S. this month. But don’t expect a quick rebound in supply from shale explorers.

The quick turnaround in oil markets is exposing the shale industry’s Achilles’ heel: Lightning-fast production declines. Shale gushers turn to trickles so quickly that explorers must constantly drill new locations to sustain output.

And they haven’t been doing that. Drilling activity touched an all-time U.S. low after Covid-19 lockdowns crushed global energy demand and explorers slashed spending to survive a crash that has erased tens of thousands of jobs and pushed some companies into bankruptcy.

It’s a phenomenon that’s ultimately attributable to the very geology of shale. Just like a shaken bottle of champagne explodes when its cork is popped, a fracked shale-oil well erupts with an initial burst of supply. The froth is short-lived, however, unlike old-fashioned wells in conventional rocks that are characterized by steadier long-term production rates. To offset the decline curve, shale explorers used to keep drilling. And drilling. And drilling.

“We just have no new drilling and these decline curves are going to catch up,” said Mark Rossano, founder and chief executive officer of private-equity firm C6 Capital Holdings LLC. “That hits really fast when you’re not looking at new production.”

Shale explorers have been turning off rigs at a record pace because the oil rout has gutted cash flow needed to lease the machines and pay wages to crews. Going forward, management teams may be hesitant to rev the rigs back up again despite higher crude prices because of fears of flooding markets with oil once again and triggering yet another crash.

Left unchecked by new drilling, oil production from U.S. shale fields probably would plummet by more than one-third this year to less than 5 million barrels a day, according to data firm ShaleProfile Analytics. That would drastically undercut U.S. influence in world energy markets and deal a major blow to President Donald Trump’s ability to wield crude as a geopolitical weapon.

Such is America’s reliance on new drilling that 55% of the country’s shale production is from wells drilled in the past 14 months, according to ShaleProfile.

“These are much bigger wells than your small onshore conventional wells. We’re in a whole other ball park here,” said Tom Loughrey, founder of shale-data firm Friezo Loughrey Oil Well Partners LLC. “We have these relatively large and numerous shale wells, but they decline fast.”

To get an idea of how dramatically shale wells peter out, consider this: less than 20% of this year’s expected drop in overall U.S. crude output will come from shuttering existing wells, according to IHS Markit Ltd. Rather, the vast majority of the supply drop will be the direct result of canceled drilling projects.

Cliff Edge. “If you want to be a highflier and a fast grower, you do that by adding lots of new wells,” said Raoul LeBlanc, an IHS analyst. But when the drilling stops, slumping output produces “a hangover effect.”

Some explorers are taking more drastic action than others. While Parsley Energy Inc. and Centennial Resource Development Inc. have said they’re halting all drilling and fracking, companies such as EOG Resources Inc. and Diamondback Energy Inc. plan to continue adding new wells, albeit at a severely reduced pace.

Much of the shuttered production probably will be turned back on by the end of this year, Federal Reserve Bank of Dallas President Robert Kaplan said during a Bloomberg Television interview.

Companies often don’t disclose their decline rates until asked, and even then, not everyone is happy about it. Shale pioneer Mark Papa, who founded EOG and until recently led Centennial, once reprimanded an inquisitive analyst.

“Subash, we don’t disclose decline rates,” he said during a February 2019 conference call in response to a question from then-Guggenheim Securities analyst Subash Chandra. “That’s kind of one of those things – kind of an entrapment question, so that’s just something that we really don’t want to talk about.”

Asked about his company’s decline rates earlier this month, Cimarex Energy Co. CEO Tom Jorden responded, “I hate it.”

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Daily Brief podcast: A look ahead at the coming week in oil and gas, May 25-29

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Category : Drilling , News

5/24/2020

Key trends for the coming week, including how industry groups’ response to low oil prices differ dramatically in the U.S. versus other producing nations, China’s big plans for its economy, and investment analysts turning their backs on key sectors of the industry.

Listen to the podcast here.

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Putin sets deadline for plan to support Russian oil industry

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Category : News , Oil Prices

By Olga Tanas on 5/23/2020

Moscow (Bloomberg) –Russian President Vladimir Putin gave his government until June 15 to come up with a plan to support the country’s oil industry while output is slashed under an agreement among the world’s main producers.

Putin ordered ministers to work out “special rates” that pipeline operator Transneft PJSC and Russian Railways JSC will charge for transporting crude and petroleum products while the OPEC+ agreement is in effect, according to a document published on the Kremlin website. Igor Sechin, chief executive officer of Rosneft PJSC, Russia’s biggest oil producer, has called for an adjustment of transportation rates to bring them into line with market prices.

Large oilfield servicing companies could also be included in the government’s list of systemically important companies, making them eligible for state support. As output falls, orders for servicing companies may fall as much as 40%, and even more in some cases, Energy Minister Alexander Novak told Putin last month.

The Organization of the Petroleum Exporting Countries and other producers including Russia agreed last month to cut global crude output by nearly a tenth in a bid to lift oil prices from almost 20-year lows. Russia and Saudi Arabia will bear the brunt of the production restraints, which are set to last for about two years, though the size of the cuts will be reduced over time.

Novak said on May 18 that the country would “move ahead fully in line with the deal” reached on output cuts. His comments signaled that Russia will likely push for strict adherence to the terms of the agreement when oil-producing countries convene next month to discuss the progress of the curbs.

Oil companies shouldn’t be sanctioned for falling below production targets set out in plans for oilfield development while the OPEC+ agreement is in effect, according to the Kremlin document, which sets out a list of instructions following a meeting late last month on the development of the energy sector.

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Oil passes $34/bbl on shrinking American stockpiles

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Category : News , Oil Prices

By Ann Koh and Alex Longley on 5/21/2020

SINGAPORE (Bloomberg) –Oil was headed for its longest run of daily gains since February 2019 after a drop in U.S. crude stockpiles added to signs that the market is starting to balance.

West Texas Intermediate futures rose for a sixth day in New York to near $34 a barrel. American inventories fell for a second week, and there was a record draw from the storage hub at Cushing, Oklahoma, according to U.S. Energy Information Administration data.

With traders now more sanguine about the chance of storage space running out, the so-called cash roll for WTI in June/July traded at 30 cents on Wednesday, above zero for the first time since December, data compiled by Bloomberg showed. The biggest commodity index, run by S&P Dow Jones, will also return to its normal schedule of futures contracts rolls as stress in the market eases.

Oil’s rally so far this month has been accompanied by a sharp jump in prices for physical cargoes. While that highlights the market’s strength, it threatens to hurt profits for refiners and also risks bringing some shuttered crude supplies back online.

“It’s difficult to justify this strength, particularly when you see how weak refinery margins still are,” said Warren Patterson, head of commodities strategy at ING Bank NV.

Prices:

  • WTI for July delivery rose 2.6% to $34.35 a barrel as of 10:39 a.m. London time
  • Brent for July settlement advanced 2.3% to $36.57

Although the large decline in stockpiles at Cushing, the delivery point for WTI futures, indicates the supply glut is starting to ease, a surprise increase in U.S. gasoline stockpiles reflected underlying weakness in the world’s largest economy.

In Japan, Prime Minister Shinzo Abe said it may be possible to lift the state of emergency in Tokyo as early as Monday if current trends of new virus infections continue.

Meanwhile, India’s state-owned fuel retailers said oil demand in the world’s third-biggest consuming country may not get near a full recovery until the end of 2020.

More oil-market news:

  • The market may be about to see the end of non-OPEC production growth, Goldman Sachs Group Inc. said in a report. That may mean OPEC could have to supply as much as 7 million barrels a day of additional crude through to 2025.
  • Some of the world’s poorest oil-producing countries are slipping behind on payments for billions of dollars in oil-for-cash loans from commodity trading houses, putting them at risk of default.
  • Manufacturing figures in the euro area beat expectations, though still pointed to a sharp contraction, a sign that the economy has reached a trough.

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Oil prices slip as China projects lower fuel demand

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Category : News , Oil Prices

By Ann Koh and Alex Longley on 5/22/2020

SINGAPORE (Bloomberg) – Oil retreated from the highest level in more than two months with doubts emerging over the strength of China’s economic recovery and as tensions rose between Washington and Beijing.

Futures in New York fell 5.6%. Beijing won’t set a target for economic growth this year due to “great uncertainty” over the coronavirus, although it did announce some new stimulus spending. Equity markets from Asia to Europe fell on expectations that tensions between the U.S. and China will escalate on concerns over a new Hong Kong security law.

In oil, there are warning signs that any recovery will be long and slow. The research unit of state-owned China National Petroleum Corp. said fuel demand in the country will drop by 5% this year. India’s consumption may not recover to pre-coronavirus levels for months

Still, the market is in much better shape than even a couple of weeks ago. Futures prices are heading for a fourth weekly gain with supply and demand starting to rebalance, while physical barrels have also rallied. American drillers are in the process of curtailing 1.75 million barrels a day of existing production by early June, according to IHS Markit.

“You had headlines from Hong Kong and China, and a sharp retrenchment on the” Hong Kong equity index, said Petromatrix Managing Director Olivier Jakob. “We need to see some confirmation that demand is truly coming back.”

Prices:

  • West Texas Intermediate crude for July delivery dropped $1.89 to $32.03 a barrel as of 10:21 a.m. in London
  • Brent for the same month fell $1.68, or 4.7%, to $34.38 on the ICE Futures Europe exchange

China’s oil demand earlier this month was probably at 92% of levels at the same time last year, IHS Markit said separately, and full-year consumption is likely to be around 8% lower than in 2019. Independent refineries have boosted their processing back to record highs, according to SCI99.

Meanwhile, output cuts by major producers have been building up and stockpiles have been eroding. Inventories at the U.S. storage hub at Cushing, Oklahoma, shrank by the most on record last week.

More oil-market news:

  • The revival of Libya’s oil industry looks even less certain following recent setbacks suffered by Khalifa Haftar, the commander trying to take over last swaths of the country outside his control.
  • In the U.S., there were signs of some production starting to return as a major Alaskan pipeline ended restrictions on throughput in part after a review of incoming flows.
  • America is doubling up on imports of the key ingredient to make premium gasoline from India ahead of summer after domestic refiners slashed production in response to the virus-driven demand collapse.

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Gulf of Mexico operators can expect an active 2020 hurricane season

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Category : News , Offshore

By Brian K. Sullivan on 5/22/2020

BOSTON (Bloomberg) –It’s becoming unanimous. Federal researchers are now weighing in on the hurricane season ahead, forecasting as many as 19 named storms for the year, at least six of which are likely to become hurricanes.

A typical season produces 12 storms, which are named when their winds reach 39 miles (63 kilometers) per hour. In all, 6 to 10 hurricanes could form, with 3 to 6 carrying winds of 111 miles per hour or more, the U.S. National Oceanic and Atmospheric Administration said Thursday.

Warm waters, the lack of a Pacific El Nino, and a greater African monsoon were among the reasons cited by the agency, who joined commercial and academic researchers in forecasting an overactive season. Atlantic storms are closely watched because they can disrupt energy and agriculture markets, and put trillions of dollars of coastal real estate at risk.

“The 2020 season is expected to be a busy one,” said Gerry Bell, lead seasonal hurricane forecaster with the Climate Prediction Center.

Other forecasters have said they worry this year’s season season could echo at least the feel of 2005 when a record 28 storms formed and New Orleans was destroyed by Hurricane Katrina.

Tropical Storm Arthur became the year’s first system when it formed May 16, prior to the traditional June 1 start of the Atlantic season.

Gulf of Mexico offshore platforms account for 16% of U.S. crude oil production and 2.4% of natural gas production, according to the Energy Department. More than 45% of U.S. refining capacity and 51% of gas processing capacity is located along the Gulf coast.

About 2.5 million homes from Maine to Texas are vulnerable to storm surge from at least a Category 2 hurricane. Stronger hurricanes tend to hit the south while they become weaker as they move north. Along the Gulf of Mexico, 3.6 million homes are vulnerable to hurricanes up to Category 4 strength. Only four Category 5 storms have ever hit the continental U.S. in the modern record.

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