At loggerheads, OPEC and Russia set oil on historic path
After its historic crash March 9, oil had perhaps its worst week since 2008 as President Donald Trump’s restriction on travel from Europe for the next 30 days — an attempt to contain the coronavirus — darkened the outlook for fuel demand. At the same time, Brent crude’s oneyear structure collapsed into a super-contango (more on that next) for the first time since 2015, suggesting a large oversupply as responses by the U.S. and European policymakers have failed to stem the price rout.
In another sign of weakness in the energy complex, gasoline futures in New York plunged 19 percent to the lowest level in more than a decade on Thursday. “This is the capitulation day for gasoline,” said Walter Zimmermann, chief technical strategist at ICAP Technical Analysis. “The virus has magnified the chronic glut and today was a reckoning.”
Let’s do the contango
Saudi Arabia and Russia’s price war is handing over a multibillion dollar profit opportunity to the world’s largest oil traders. With each country pumping more oil into a flooded market, crude prices have flipped. A new price structure, called a contango, allows the traders to make easy money by buying crude cheap, storing it, and selling it forward.
The so-called prompt contango, measured by the difference between Brent crude for delivery in one and two months, widened on Wednesday above $1 a barrel to a four-year peak — an indication of mounting oversupply.
“Everyone is looking for tanks,” an executive at a major oil trading company said.
More companies slash spending
Apache Corp. and Noble Energy each cut about a third of their planned capital spending, about $650 million and $550 million, respectively, from their budgets used to fund oil exploration and production. Apache also cut its quarterly dividend by 90 percent to 2.5 cents per share, down from 25 cents.
“We are significantly reducing our planned rig count and well completions for the remainder of the year, and our capital spending plan will remain flexible based on market conditions,” Apache CEO John Christmann IV said in a statement.
Apache and Noble are the latest U.S. oil and gas producers to slash spending after Monday’s oil crash.
Tomlinson: Why shale can’t win
Chronicle business columnist Chris Tomlinson weighed in on the price war begun by Russia and OPEC+, saying “the only reason OPEC+ cut production was to raise profits. But shale drillers cut into those profits by stealing market share. The only logical reaction was for Saudi and Russia to let the price drop and take back market share.
“Over the next decade, demand for oil is going to slow as consumers adopt alternatives, and the oversupply will persist. U.S. shale companies only can survive if OPEC+ manipulates the market.
“Current events prove that shale oil relies on an unreliable business plan based on politics, not economics, making it a risky investment.”
Shakeout, not bailout
Bloomberg columnist Liam Denning called out Continental Resources founder and majority shareholder Harold Hamm for seeking a shale bailout amid falling oil prices.
“Oil and gas production clearly is a vital sector,” Denning wrote. “But that doesn’t make every marginal barrel or molecule vital. Commodity prices, along with dismal equity multiples and credit spreads, were telling us that even before this week. Much of the industry engaged in a decade-long, WeWorklike expansion in global oil, aided by third-party money and rewarding many executives handsomely. In doing so, they flattened oil and gas prices and return on capital.
“So it is almost comical to now hear Hamm decry Saudi Arabia’s sudden grab for market share as ‘illegal’ when his own bit of the oil industry has been doing that for years — and helped by Saudi Arabia’s prior restraint, to boot.”
Winds of change for summer power
The state’s grid manager is bracing for another record-setting summer of electricity demand, but more generation capacity — thanks to a boost from wind — should help ease some pressure.
The Electric Reliability Council of Texas predicts summer peak load will top out at 76,696 megawatts this summer if the weather is normal. That’s about 2.5 percent higher than last summer’s peak load of 74,820 megawatts set Aug. 12, when a heat wave caused wholesale electricity prices to rise to $9,000 per megawatt hour.
The grid manager predicts that Texas will have a reserve margin of 10.6 percent heading into summer.