Energy Prospectus

Opening Prices for DEC20 futures:
> WTI oil is up $0.37 to $38.93
> HH gas is down $0.052 at $3.201

Oil clawed back some losses in New York as Tropical Storm Zeta shut down production in the Gulf of Mexico. Futures rose 1.1% after tumbling below $39 a barrel on Monday. A slightly weaker dollar boosted the appeal of commodities priced in the currency. At the same time Zeta became the latest storm to threaten U.S. Gulf output. Prices fell sharply at the start of the week as Libya moved closer to boosting output back to 1 million barrels a day.

You might notice that oil and gas prices seem to move in opposite directions. That's because the most significant threat to the natural gas price is the increase of "associated gas" production from wells drilled for oil. There is not going to be much of an increase in oil well drilling until WTI is at least $50/bbl. A few upstream companies will add a drilling rig or two and some DUC wells will be completed in November and December so they can be included in year-end reserve reports, but none of the companies that I follow are planning a significant increase in their capital programs.

More than 15% of Gulf of Mexico oil already shut in ahead of Tropical Storm Zeta . S&P Global .
Top producers in the deepwater Gulf of Mexico said they have already started evacuating oil and gas platforms and shutting-in some production ahead of Tropical Storm Zeta, which is expected to strengthen into a hurricane and likely trigger more oil and gas volumes to come offline. BP and Equinor confirmed they are shutting-in production on their platforms, while Chevron, BHP and others said they are evacuating some personnel and considering decisions on production reductions.

There appears to be very strong support for WTI around $38.50 and very strong resistance at $41.50. My guess is that WTI will stay within this trading range until steady declines of U.S. and total OECD oil inventories are confirmed. That should happen near the end of Q1 2021 and accelerate quickly if there is a working vaccine for COVID-19. Vaccine or no vaccine, the global economy needs to pick up the pace (already happening in Asia) unless the 99.9% of human survivors are willing to accept a much lower standard of living.

As I showed on Slide 7 of Saturday's podcast:
> U.S. oil production peaked at 12,860,000 bbls per day in November, 2019 < It may be the last time we see U.S. production this high.
> U.S. production was already on slow decline even before the pandemic.
> It dipped to 10,019,000 bbls per day in May, 2020 primarily because of well shut-ins, most of which were forced by the pipelines refusing to take more oil.
> Most of the shut-ins were restored in June & July, bringing U.S. oil production back to 10,984,000 bbls per day in July.
> Hurricane activity in GOM is expected to result in lower production for August to October, but I doubt we see the U.S. back over 11 million BOPD.
> EIA will report August actual production next week in their monthly 941 report. It is based on data provided by each state.
> Post Hurricane Zeta, assuming it is the last significant tropical storm this year, I am expecting an October exit rate of ~10.7 million BOPD for the U.S.
> We aren't competing enough oil wells to stabilize U.S. production, so I expect a steady decline to under 10.0 million BOPD by mid-2021. See red arrow on slide 9 on my October 24 podcast.
> We may see a small increase in December because some companies will complete more DUC wells in November and December to get them in year-end reserve reports.
> Production declines will accelerate in Q1, as they always do because of winter weather's impact on completions. We need more than double the number of active completion crews running today to stabilize U.S. production.
> It will take MUCH HIGHER oil prices than we have today to triple the number of rigs drilling for oil in the U.S. That is what it will take to get U.S. production growing again.
> Raymond James' forecast of $70/bbl WTI a year from today might be too conservative. See the right side of Slide 3 in my October podcast.

PS: Drilling and Completion activity is down all over the world, so we aren't the only nation with declining oil production. Post-pandemic demand for oil will increase much faster than supply can respond.