The coming oil supply rise
The latest energy news: rolling back output cuts, price of carbon heats up, Americans hit the road
Earnings season is imminent — and it’s not going to be pretty. Every sector will suffer, but none more than energy.
Second-quarter numbers will paint the most extensive picture yet of the carnage wreaked by the coronavirus pandemic. Revenues will tumble, profits will tank and writedowns will be commonplace. Bosses will urge investors to look forward not back.
Energy Source will be surveying the damage as it is reported, but today we heed those pleas and look at the road ahead for the sector at large.
Our first item looks at Opec’s plans to roll back output cuts and what lies ahead for US shale. Our second is about how hopes for a green recovery are driving up the price of carbon. Elsewhere in ES today: Americans are back on the roads. And what next in the Dakota Access Pipeline drama?
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Has Opec+ already won the market share battle?
Global oil supply is about to rise. Provided it can keep a lid on crude prices, Opec+ should get the lion’s share of the increase.
The cartel’s oil output reduction of 9.7m barrels a day from May to July has, in tandem with rising demand, tightened the market. But the International Energy Agency and others now predict a deficit in the second half of the year, meaning output can begin to return to pre-crash levels.
Tomorrow, Opec+’s Joint Ministerial Monitoring Committee is likely to endorse a long-planned supply increase from August of 2m b/d. Saudi Arabia is keen to stick with the schedule, according to three people familiar with its position.
Meanwhile US suppliers appear ready as ever (see graphic) to compete for a share of any supply increase. The price crash sent American output tumbling from 13m b/d to a low of 10m early last month, according to Genscape, a division of Wood Mackenzie. But a rally to $40 a barrel has allowed production to bounce back to around 11m b/d as some wells have restarted.
More supply is coming. Florian Thaler, chief executive of OilX, which monitors daily global oil flows, told Energy Source that US output would surge by at least 600,000 b/d this month. The IEA predicts it will keep rising gently through the end of the year.
Will it? The numbers of operating rigs and fracking crews in the shale patch continue to fall, so the US output rise isn’t led by drilling. It’s because at $40 a barrel — WTI’s price over recent weeks — operators think they can profitably restart the wells they shut earlier.
But to keep shale production steady, you need to keep drilling and completing wells — that’s the sector’s distinctive cast-iron rule. Without a swift pick-up in activity, supply could drop by 300,000 to 400,000 b/d per month, according to analysts.
The big operators will drill just enough to maintain new output and keep the decline rates at bay. But more profit, not more production, is the priority over the next 18 months. That was the message from Matt Gallagher, Parsley Energy’s chief executive, in an interview with the FT this week. “We don’t need to be growing, even if there’s a price signal.”
US production would not recover this year’s highs in his lifetime, the Parsley chief said. And while some “offshoot companies” might “adopt the growth stance” again if prices rose, “it’s not going to affect the world supply-demand dynamic”.
Have the Saudis, who helped push the oil price off the cliff in March, won? “Yes,” said Mr Gallagher in an email exchange after our interview.
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The curious case of the soaring carbon credit
If anyone tells you they know of a one-way bet it’s generally a good idea to nod sagely then check your wallet is still in place.
But it’s not clear this is widely understood in the European carbon market.
The EU Emissions Trading Scheme, or EU ETS, has soared in the last few months, with traders looking beyond the market’s frankly dreadful short-term fundamentals to focus on the bigger picture: that the EU wants a green recovery and therefore will need carbon prices to rise.
On Monday morning, prices jumped 5 per cent to get above 30 euros a tonne — the highest in 14 years — and came within just a few cents of hitting the all-time record of 31 euros a tonne from 2006.
Prices have more than doubled since March, despite actual emissions being widely expected to fall sharply this year — reducing demand for allowances — as economies slow in the face of the coronavirus pandemic.
So what is going on? Well, some fingers have been pointed at speculators and hedge funds, but not everyone is convinced.
Trevor Sikorski at Energy Aspects highlights that the latest Mifid positioning report suggests that more than 10 times as many new long positions came from commercial and compliance buyers in the second quarter — broadly industrial end users and utilities — as opposed to investment funds.
“The causes of strong trend rallies are often identified as being speculative, particularly if moves are not well supported by fundamentals,” Mr Sikorski said. “[But] while proprietary sources are potentially playing a role, exchange data are far from convincing.”
Instead, utilities have been happy to buy as they believe they can see what is coming: that the EU will at some stage reduce the number of allowances further to help support the price as part of a broader push to lower emissions.
“Most participants have not had to sell, with sector hardships being lessened by government stimulus loans and/or recourse to repo trades,” Mr Sikorski said. “Instead, the data suggest that they have seen the current period as an opportunity to buy, given the expected future shorts.”
But does that mean the market has become a one-way bet? With the EU effectively controlling how many allowances to release in the future, it’s starting to sound a little like it. That’s almost certainly reason for caution.
Data Drill
Americans are going to work again: overwhelmingly by car — and not by public transport. An aversion to crowds, and the ensuing risk of coronavirus transmission, is keeping them off metros and buses, Apple mobility data suggest. Instead, the inhabitants of New York, Chicago, Los Angeles and Houston are back behind the wheel in numbers exceeding pre-crisis levels.
Even in California and Texas, where fresh coronavirus surges have prompted a reimposition of restrictions, car travel has recovered completely.