Could we have an oil shortage a year from now?

[dan_s]

I've been working or covering the oil & gas industry for over four decades. I've lived through several oil price cycles. I will admit that this one is "weird", but it is sure to reverse course at some point. The phase "Nothing cures low oil prices faster than low oil prices" is true. Mr. Putin definitely agrees, which is why he started the oil price war with Saudi Arabia.

My HOPE is that we get past this FEAR of COVID-19 soon. Sooner or later we have to get past this and get back to work. We have accepted that seasonal flu is going to kill 400,000 to 600,000 people per year. I have trust that our incredible healthcare professionals will come up with viable treatments to help people get over COVID-19, but like many other health problems we may have to accept that we will get sick from time to time. Life on Earth is not "PARADICE". I believe that comes after we die. This is a fallen world and we are all going to face hardship.

Life without sports is not worth living anyway, so let's move on.

The world beyond the pandemic will require lots of energy and hard work. Oil will provide lots of the energy and the cheap stuff is gone. New oil supply will require money for exploration and development. That's not going to happen with WTI under $30/bbl or $40/bbl likely not at $50/bbl. Again, the cheap stuff is gone! Unless Saudi Arabia and Russia have a "death wish" they will lower supply to raise oil prices.

This is from my friends on the Raymond James Energy Sector Team.

As we noted last week, oilfield activity is beginning to grind to a halt. Our expectation remains that the rig count will be cut by more than half, and we see risk skewed to the downside even on this Draconian forecast. In our first blush last week, we updated our industry assumptions and downgraded several stocks. Today, we are issuing our new estimates that contemplate the rapid decline in activity in the coming months.

We currently expect 2020 U.S. upstream spending will decline by 50% y/y. A meaningful deceleration has already begun, with activity to remain in free fall at least until the summer. Additionally, barring an oil price recovery above the futures strip, we believe the bias to our 2020 E&P capex assumption is still weighted lower than our expectations. While it may feel dire, the level of oversupply in the oil markets means that E&P activity must fall to attempt to fix the problem. There are some restrictions to how quickly activity can fall, but what is clear is that the U.S. oilfield needs to effectively come to a stop. It remains unlikely that non-investment grade credit markets will open up to oilfield services without a significant rebound in oil prices. Therefore, reducing cash burn is the goal. Eventually necessary service activity will normalize, however there is no clarity as to when this would occur. While this is a cyclical industry, at today's activity levels some companies may not get to the better times. As such for those that do get back to more normal times, the competitive dynamics will likely be much different. Winners in this environment are survivors, and outperformance is not breaching debt covenants. Our relatively safest names are HAL, WHD, and NR.
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It is now a sure thing that U.S. oil production is going to decline rapidly wants it rolls over. Once the decline starts, it will be tough to reverse. Mr. Trump is wise to fill up the SPR with cheap oil while he can. Love him or hate him, the guy is a businessman.