“The bottom is past and a long recovery now underway,” wrote Credit Suisse oil analyst Bill Featherstone in a research note Friday.
Really? Could the worst truly be over for the oilpatch? Ten weeks into the Coronavirus crisis, and a month after crude oil prices dropped below zero, the price of West Texas Intermediate crude is now at $35. America’s oil producers have slashed output and cut $400 billion from capital spending budgets. The pace of drilling is down more than 80% from the peak of the Great American Oil Boom that saw output more than double in less than a decade.
So where’s the evidence of green shoots?
To start, Americans are driving more. Corona-lockdowns had gutted gasoline consumption by mid-April. Now, according to Deutsche Bank numbers, we’re only driving 30% less than before. Likewise, worldwide petroleum demand appears to have bottomed out in May at 79 million barrels per day (bpd), according to Rystad, the energy consultancy, which sees June demand creeping up to 84 million bpd. Still a far cry from the 99.5 million rate at the end of 2019, but it’s progress.
Meanwhile, America’s oil drillers are helping to alleviate the oversupply by mothballing rigs with unprecedented urgency — the Baker Hughes
As the pace of U.S. curtailments has slowed; analysts at Cowen & Co. have become slightly more optimistic, now expecting a bottoming of U.S. drilling activity in the third quarter of 2020. A week ago they thought that wouldn’t come until 2021.
And yet, there’s still plenty reason to remain pessimistic on the U.S. oilpatch. Equity analysts have been dropping coverage of overly indebted companies; Cowen on Friday gave up on offshore drillers Valaris ($6 billion in debt against just $70 million in equity) and Noble ($3.8 billion in debt and $30 million equity), saying of the latter “a debt restructuring is a significant possibility.” Such bellwhethers as Chesapeake Energy
The pain has certainly not spared the biggest operators. Chevron
And then there’s Occidental Petroleum, the big oil company in the direst of straits. Oxy
This should all make OPEC happy. The cartel sees this crisis as the golden opportunity to knock America’s frackers out of business and regain lost market share — eventually. OPEC has instituted 10 million bpd of cuts in May and June in order to stabilize the market amid demand destruction. Analysts expect continued OPEC curtailments of 7.7 million bpd during the second half.
But there’s no way that OPEC is going to hold back further in order to make room for America’s frackers. According to Deutsche Bank numbers, OPEC’s share of the global oil market has slid from 42% a few years ago to 31% — its lowest in 20 years.
Recall that this oil crisis began even before the virus crisis, with the Saudi Arabia vying with Russia to swamp the world with oil in order to regain share. Before agreeing to emergency cuts, the Saudis in March launched an armada of tankers en route to the U.S. Gulf Coast. Last week 11 of the 16 Saudi tankers unloaded 23 million barrels here (according to Argus Media) drawing criticism from the likes of Sen. Ted Cruz, who criticized the Saudis for trying to further drive down oil prices and hurt American shale drillers. Cruz has floated the idea of an anti-dumping tariff on foreign oil.
Unfortunately, there’s plenty more where that came from; since February the amount of extra crude being stored in tankers at sea has trebled to 300 million barrels. Analyst Michael Hsueh at Deutsche Bank sees oil prices recovering to $45/bbl in 2021 as long as OPEC is able to maintain cooperation on export cuts. With all the excess production capacity offline around the world, even that looks like wishful thinking.