Transformation in the Global Oil Energy Market: Is the End Nigh?

FV: We don’t believe shale production recovers to the extent it had grown in prior years, the U.S. refining system already relied on Canadian crude to balance its crude diet and produce a higher diesel cut. The cut in productions should mean Canada takes more market share in the medium/heavy sour component for U.S. refiners. The key issue is that demand for distillates, diesel and jet, collapsed and inventories are climbing very quickly. This will keep demand subdued until we resume economic growth.

FV: Some rumblings that Russia and Mexico are holding firm. I believe prisoners’ dilemma kicks in for these groups as soon as there’s a bit of improvement, as it has for U.S. shale independents.

FV: Drilling of sustaining well pads in the oil sands should come back fairly quickly once there’s a price signal, my guess towards end of 2020, 2021. Shale plays in Canada may have a more challenging outlook, as natural gas and NGL prices remain depressed.

FV: Led by large-cap/majors, unlikely at the 30-40% p.a. clip we saw. Concentration in the key basins, mostly in the Permian.

FV: Speaking solely from the oil sands companies I cover, governance tends to be aligned, certainly under new managements in several of the players. There’s a need for pipelines, even after this pandemic.

FV: There’s be a massive drop in activity in gas plays, both dry and wet and the drop in associated gas production in oil plays will also contribute to bringing some semblance of balance to natural gas markets. Still, the lack of LNG demand, weaker economic growth and high levels of storage likely cap the upside. Rejection of NGLs into the gas stream also reduce the volume needed (more ethane/propane in the stream gives a higher BTU count). It’s hard to be bearish on $1.80/mmbtu, but these limitations and the likelihood that Permian producers get back to completions likely caps upside.

FV: With skepticism, always. The industry, E&Ps, Refiners and to a lesser extent midstream, are price takers. Price is less of a component than capital allocation on returns. Not taking on too much leverage and looking for the lowest cost of supply will always be the critical component in commodities, in our view. Of course, there can be cases of sunk costs, i.e. it may not make sense to build a new SAGD plant, but the go-forward cost of supply can still be very low compared to peer plays, including the cost to maintain production stable.

FV: Vaca Muerta is a high quality shale play, with stacked reservoirs. Unfortunately, the fiscal situation in Argentina was deteriorating throughout 2019 and was aggravated in 2020, despite successful handling of the COVID-19 pandemic to date. Price and capital controls, along with the global oil price crash are likely to keep external players from increasing their capital allocation to Vaca Muerta. YPF will need to lead the way, but with Argentina still negotiating its way out of its latest fiscal cliff, it will need to rely on internal funds or raise debt at much higher costs.

FV: Homeworking definitely requires more electricity from residential, but commercial is still more electricity overall than residential. During lockdowns U.S. Northeast electricity demand fell by 11% (link: https://blinks.bloomberg.com/news/stories/QAZUJFDWLU74), margins are higher in residential, but volumes are lower. The matrix has changed, but the rate of that change will slow. Prior to this, Germany, the world leader in solar installations per capita, built coal plants because of intermittency. Natural gas prices enable more coal to gas, but trade disputes likely drive China and India, two of main importers of LNG to rely more on internal sources (i.e. coal). The change in marine fuel also likely pushes more fuel oil to the energy matrix in the developed world as its price crashed.