Goehring & Rozencwajg Market Update - Mar 24

[dan_s]

I just finished listening to a replay of the Goehring & Rozencwajg Oil Market Update. Here are the highlights from my notes.

If you'd like to listen a replay of the hour long Webinar, send me an email and I will send you the link.

2020 and 2021 will be an "unprecedented" period for the global oil market. We already knew this.

> COVID-19 followed by the Oil Price War caused oil price to drop over 60% per barrel. Geohring called it "Hyper Hystaria" and "Pure Panic Selling" with no prisoners.

> The no prisoners part has created some "once in a lifetime buying opportunities". My comment is that Investors totally ignored companies that have most of their oil hedged at over $50/bbl. By "throwing the babies out with the bath water", individual company analysis is extremely important.

> Virus related travel restrictions, lockdowns, etc cause a big drop in demand, but demand will rebound. Supply will also fall but not rebound quickly.

> U.S. oil production was going down in 2020 even if WTI stayed over $50/bbl. < This confirms my $65/bbl estimate of the "Right Price" for oil.

> The HUGE upside the EIA kept predicting for U.S. shale oil production was never going to happen at $50/bbl and now may NEVER happen because there is very little Tier One acreage left. Upstream companies have been doing "High Grading" since 2014 and most Tier One drilling locations are gone. There is a big drop from Tier One to Tier Two.

> Horizontal well improvements like longer laterals, more sand, targeted frac jobs etc. have reached there limits. Better drilling and completions cannot make better rock.

> 35% now and going to more than 50% decline in upstream spending.

> 70% decline in well completions will result in a MASSIVE DECLINE in U.S. oil production 2.0 to 2.5 million barrel per day decline, including NGLs. There will also be big supply declines out side of the U.S. Most of the OPEC cartel countries are already on decline. NOTHING IS ECONOMIC TO DRILL AT $25/BBL OIL.

> Oil demand is seasonal and Q1 is the low point each year. This is the 3rd reason oil prices crashed in March.

> For the year, supply will exceed demand by 1.0 to 1.5 million BOPD, but big over-supply in Q2 will narrow in Q3 and S/D should be balance by year-end.

> Most important for investors: Huge drop in capex will cause a massive under-supplied oil market in 2021.

> Even assuming that OPEC and Russia go to maximum production, the global oil market could be under-supplied by 4.5 million BOPD by mid-2021 (assuming COVID-19 hysteria ends in Q2).

> A 4.5 million BOPD supply shortage actually can't happen because oil inventories can't much lower than a 30 day supply before refiners start their own "price war' on the upside.
The market will use high oil prices to depress demand and increase supply. However, with 2/3rds of OPEC cartel countries "out of business" and so much damage to the upstream and oilfield services sectors, the supply side will take much longer to rebound.

> Leigh Goehring made the remark that $25/bbl WTI is 100% unsustainable because in a few years there would literally be no oil industry.

> This world will be running on oil for many more decades (despite the Green New Deal BS) and oil prices will increase and might need to go to dangerous levels to get the necessary supply. "Dangerous" because WTI over $100/bbl will slow global economic growth. < My take is that early in 2021 WTI will go to $60, blow through the "Right Price" and go to triple digits in summer of 2021.

> $25/bbl WTI will bankrupt 50% or more of upstream and oilfield services companies. < "Sustainability" is what I am focusing on now. Oil and Gas Hedges that get upstream companies through this year are extremely important. Plus, focus on companies with the best leasehold positions (EOG, CXO and PXD are tops in our Sweet 16). Bank relationships and debt structure are very important. Adam and Leigh said they are looking at picking up some distressed debt to get their fund invested in some high quality upstream companies.

> Very interesting comment was made by Adam that Saudi Arabia announced that Aramco is cutting capex by 35% and G&R were both skeptical that Saudi Arabia can increase production. The largest field in the world is Ghawar and it is on decline. As I have posted here many times, Saudi Arabia can increase oil sales from inventory, but the higher volumes are unsustainable for longer that a few months.

> Russia will win the oil price war, but it will be extremely expensive for both countries.