ENERGY — 2020 has taken a toll on the world’s energy market, but just how bad is it? Experts say COVID-19, economic shutdowns and a disastrous oil price war this Spring have left the industry in a position to survive but warn that it will be different.
The Cipher Brief spoke with expert Norm Roule, former senior advisor with ODNI and career CIA officer, who advises regularly on Middle East political, security, economic and energy issues.
The Cipher Brief: What are the main factors driving the energy market today?
Roule: I think five issues dominate analysis of current energy market trends: The international response to COVID; the pace of global economic recovery, especially in China, the United States, and Europe; OPEC+ producer discipline; the consolidation of the U.S. shale industry, and the near-term production of countries like Libya, Iran, and Venezuela. Longer-term, the collapse of capital investments in the oil industry will impact future production as mature fields fail to be replaced.
The Cipher Brief: Could you give a sense of where OPEC+ discipline stands?
Roule: OPEC + production discipline has been quite good. This posture, combined with the deep cut in U.S. production, allows the market to work through a massive oil glut and match production with the pace of global economic recovery. One example of OPEC producer discipline illustrates this point. In the past two months, Saudi oil production has averaged just under nine million barrels per day (bbl/d). That's 3 million bbl/d less than April and the Saudi’s lowest production figure since the 2010-2011 timeframe.
Saudi Arabia, the U.S., and Russia have become more than swing producers. They are guardians of market stability. The Saudis and Russians regularly communicate, and each seeks to avoid a repeat of the disastrous price war of this Spring. Washington and Riyadh are in frequent contact on energy issues. The U.S. has assigned a new energy representative to the region, and the topic was part of the recent U.S.-Saudi Strategic Dialogue. Such cooperation is likely to continue as everyone involved seeks to avoid any new turbulence to the world's fragile economy.
Riyadh has also significantly devoted considerable energy to building production discipline within OPEC. The Saudis have made a point of leading the way. Riyadh now produces less oil than at any time in the last decade. The Saudi energy and foreign ministers have engaged counterparts in Iraq, Nigeria, and other countries that traditionally missed OPEC cut quotas. Riyadh's position has been that it will accept heavy cuts but won't let others take advantage of this move to overproduce or grab Saudi market share. Overall, the results have been positive, even remarkable, given the enormous revenue demands faced by Iraqi and Nigerian leaders.
OPEC planned to increase production in January, but this is in question due to anemic economies and the return of Libyan production. OPEC hasn't dropped its plan, but conditions in the coming weeks will dictate its decision. Looking on the horizon, OPEC leaders are already wondering which steps might be required should Iranian or Venezuelan oil production return in 2021.
The Cipher Brief: What about the U.S. shale industry?
Roule: Few U.S. industries have been more dramatically hit in the past year than the U.S. shale and associated chemical industries. But the bottom line is that U.S. shale sector will survive, and the U.S. will remain a force in the global energy scene. Of course, everyone is watching to see how the next administration handles the fracking issue.
The industry has endured a terrific beating. Between March and August, these sectors shed well over 100,000 jobs, about 60,000 of which were in Texas alone. Most of these jobs won't return in the near term, and this has resulted in terrific hardship for communities that relied on this employment to sustain businesses and tax revenue.
A smaller shale industry in a world of sputtering economies and heavy hurricane season invariably means less production. In the first part of this year, U.S. weekly oil output hit just over 13 million barrels per day. Compare that to current production at just under 10 million barrels per day. U.S. oil demand is down by about 13 percent. We can expect a gradual improvement in the coming months as a COVID vaccine arrives and international air travel resumes. Chinese imports of U.S. oil increased a bit over last year, but exports to Europe have plummeted.
This collapse has hit less-capitalized production and service companies the hardest. Dozens of companies have been forced into bankruptcy with more likely to fall. Survivors have been firms blessed with cash reserves and an ability to sustain operations, maintain required capital investments in maturing fields, and defer dividend payments. That's a lot to ask of an industry where many companies operated with tight profit margins.
Let me offer one illustration of where things stand. Analysts count the number of operating oil and gas rigs as a metric of industry and consumer confidence. The U.S. began the year with about 1,075. As of last week, that number was 287. Although we have seen some improvement in numbers since July's record low of 253, we are still looking at figures last seen in 1940.
The industry will survive, but it will be different. Its midterm future will be in fewer and larger firms. Large companies use the scale of their operations to access increasingly cautious debt markets as well as to negotiate better deals with suppliers. All of this has meant an unprecedented wave of consolidation involving multi-billion-dollar acquisitions by ConocoPhillips, Chevron, Occidental Petroleum, among others. Further mergers seem inevitable.
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