Crude Context
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“Beware unexplained complexity, lest you confuse it for quality” - Jeremiah Lowin
***Editor’s note: Matt will be in Houston on Wednesday for the SPE-GCS A&D Symposium; if you’re interested in grabbing drinks after, at say ~5:30 to ~8:30, somewhere off of Main St. - shoot over a message via LinkedIn, Twitter, or email [crew@reservereport.co]; will post specifics in Tuesday’s newsletter***
EARNINGS.
Majors / Large Cap E&P Earnings have been coming out for the last ~3x weeks…
…and shares have fallen ~5% - 20% since late Jan.
Considering the wider dispersion of returns that we’ve witnessed over the past year, this round of earnings has been…
…boring.
**And that’s a good thing**
However, the negative trend is noteworthy.
We believe it’s due to commodity market developments.
So, let’s take a closer look at Crude -
CRUDE DEMAND.
BAML’s Matt Zhao (matty.zhao [at] bofa.com) & Co put out a couple quality notes on Chinese demand:
China Petroleum & Chemical Industry Federation (CPCIF) on China’s private petrochemical producers, only 29% of them can operate at full production as of 12 Feb & 40% are still closed for production…
… CPCIF expects the negative impact on China’s private petchem producers to continue to worsen in the near future.
The common problems they face are:
constrained transport for raw materials and finished products;
product export constraints;
lack of demand from domestic market;
shortage of protective medical equipment, such as gowns, masks and gloves;
lack of working capital
The survey shows many regions are still restricting entry of trucks from other provinces and this affects the petrochemical producers who largely rely on road transport.
&
JLC [JLC oil analyst Ms. Wang Yanting] believes the COVID-19 outbreak will have a more negative impact on China’s refining sector than that of SARs outbreak in 2003, i.e. oil product output may decline by 30%+ YoY in 2M20, whereas during SARs, China’s output for gasoline, diesel and jet fuel declined by 12%, 11% and 26%, respectively.
Shandong teapots’ runrate dropped to 41% and SOE refineries’ dropped to 72% in mid-Feb, both at the lowest in 3 years…
…JLC’s channel check suggests all SOE refiners will not purchase 3rd party oil product in Feb and prioritize their own production. Some SOE-owned refineries may choose to do maintenance during this period of time.
CRUDE SUPPLY.
The good news for E&Ps is that - right now - the supply side of the crude world is messy:
Venezuela declared an Energy Emergency - production has dropped from nearly 3MM bopd in ‘14 to <1MM bopd;
Meanwhile, Iran - under US sanctions - has seen production drop from nearly ~4MMbopd to ~2MM bopd;
40% of Petrobras’s workforce had been on strike (although that wasn’t affecting production); &
And Libya…
Libya is going through a California divorce:
“[Khalifa Haftar] also ruled out a truce with “terrorists” and “Turkish invaders”, suggesting a near year-long battle will continue” - Reuters
Really, it’s been a mess for the last 9yrs.
The UAE, Egypt & Russia are backing General Haftar.
We think - with that backing - that he will fight until victory.
Libyan crude production is down 90%, to ~0.1MM bopd, since Haftar’s forces shut down exports, ~1x month ago.
For E&Ps, crude prices could be much worse -
OTHER NEWS.
Alix Steel interviewed Parsley’s Matt Gallagher - (skip to the 1:10 mark)
Scott Sheffield is calling for energy investors to sell shares or pull funding from companies that have high rates of gas flaring
Per Ryan Sitton’s report, the firms w/ the high rates would be smaller, private players
Chevron made an attempt at humor… we support the effort:
That’s it for this week - we’ll be back on Tuesday -