Energy Prospectus

Plains All American Pipeline, one of the largest US midstream companies, expects commercial oil storage in the US to fill by mid-May as demand has plummeted because of efforts to fight the Covid-19 pandemic. Plains expects US refinery demand for crude will decline by at least 30pc, or about 5mn b/d, and crude exports will drop by 1mn b/d, according to a filing yesterday to the Texas Railroad Commission, the state's primary oil and gas regulator. Plains made the estimates in late March. The Texas Railroad Commission is planning a virtual hearing on 14 April to discuss curtailing the state's oil production to help balance the market in the wake of the crash in crude prices and a sharp drop in demand because of the coronavirus.

An idea: Stop importing oil. < This is much harder than it sounds.

The downstream part of this business is HUGE. Lack of demand for refined products is causing the supply chain to back up and back up fast. Putting oil in the SPR would help. Maybe the next multi-$Trillion Stimulus bill could pay for free gasoline for all people returning to work.

If the Texas RRC decides to "curtail" oil production on April 14, that means the price of oil will almost certainly stay below $40bbl (?) Ie bankruptcy for
small caps such as DNR and CHAP (?)

I think what the Fed announced yesterday will help lots of small caps.

Also, keep in mind that the oversupply of oil should be just a short-term problem unless the government decides to keep extending the lockdowns. That won't just keep oil prices depressed.

BTW the Texas RRC won't need to curtail production, it is happening already at a fast pace.

WTI is extremely unlikely to go over $40/bbl before Q4 no matter what anyone does.

Dan, in my opinion, Texas RRC needs to limit production to provide the market assurance that producers won't ramp up production at first sight of $50 oil. Otherwise, the market participants will assume a return to prior production levels. Without some mandated cap (or massive consolidation), I just don't see market price stabilizing.

Dave;
Keep in mind that U.S. oil production started to decline even when we had $60 WTI in December. Part of the decline was seasonal, but it was also due to Wall Street's pressure on the public companies to "live within cash flow". Even with expectations of much higher oil prices than we have today, a high percentage of the upstream companies that I follow closely were lowering their drilling programs from 2019 to 2020. Since announcing their original 2020 capex programs, most companies have cut drilling new wells by 50% to 100%.
The decline in Texas oil production will accelerate this summer, as I point out in the podcast.
If WTI spiked to $50 tomorrow, we will not see an increase in drilling activity.

Keep in mind that the Permian Basin shale play is actually still in the early innings. During the first few years, upstream companies where leasing up a lot of acreage and they had to drill a lot of wells to hold those leases by production. Now that most of the Tier One leasehold is HBP, they can slow down and develop the acreage on a more controlled manner.

Over the next twelve months, U.S. oil production is expected to decline by 2.0 to 2.5 million barrels per day. A lot of the decline will come from Texas. The EIA's weekly estimates that U.S. oil production exceeded 13 million barrels per day were wrong, based on flawed math. On a monthly basis, U.S. oil production has NEVER exceeded 13 million barrels per day of oil and it is now unlikely that it ever will unless we see an extended period of $100 oil.

The damage being done to the oilfield service companies will be difficult to repair.

I high recommend that the U.S. use this time to fill up the Strategic Petroleum Reserve. A year from now I pray we are not dependent on OPEC and Russia for our vital oil supply.

A note that I received from Raymond James on Friday, April 10:

"Although a long-term positive for the global economy, oil prices have fallen to levels not seen since many moons ago. The emergence of the oil price war between Saudi Arabia and Russia, compounding the dramatic fall-off in global demand (estimated to be worse than the 2008 and 2009 declines combined) has resulted in prices at which the global oil industry cannot sustainably function. For this reason, the price war is bound to end soon. Further support for oil is embedded in our expectation that aggressive monetary policy and a burgeoning budget deficit (~$3 trillion) will cause the dollar to modestly weaken throughout the year. Oil will likely continue to test the $20/bbl level this quarter, while lockdowns and demand disruptions are the most severe, before rebounding towards $45/bbl by year-end".