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OPEC cuts oil demand forecasts, BP sees ‘peak oil’ in 2020s

Developing countries’ difficulty in containing the spread of the coronavirus pandemic will keep a lid on global oil demand, particularly in India, the OPEC cartel said Monday as it cut its forecasts.

OPEC cut its estimates for world demand by 400,000 barrels a day for both this year and next. It now sees a drop in demand of 9.5 million barrels a day in 2020 and a rise of 6.6 million barrels in 2021.

“Risks remain elevated and skewed to the downside, particularly in relation to the development of COVID-19 infection cases and potential vaccines,” the cartel said in a monthly report on the industry.

Beside the trouble in some developing countries, which together with the United States have had a harder time than Europe or China in limiting the first wave of virus contagions, OPEC said it expected a slow pick-up in energy demand for transportation in rich countries. Airlines around the world are flying only a fraction of their normal amount of traffic, with a full recovery not expected for another couple of years.

The price of oil plunged during the initial phase of the pandemic as businesses and transportation ground to a halt around the world. The uncertainty surrounding the industry, coupled with concerns about climate change, has pushed some major oil companies to shift more aggressively towards renewable energy or natural gas.

BP says it expects demand for crude oil to peak in the early 2020s. If governments become more aggressive about reducing carbon emissions, demand might never recover from the current slump, its said in a report on the industry’s outlook.


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Falling oil prices hitting production

Husky cancels plan to sell off network of retail gasoline stations

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Oil and gas prices continue to move downward despite moves from OPEC+ and others to curtail supply. The response from producers has been to cut spending, trim outputs and curtail share buybacks and dividends as the world reels from both the COVID-19 slowdown and the recent Saudia-Russia output feud.

Despite last week’s OPEC+’s output deal, the oil market is hugely oversupplied. This comes at a time when COVID-19 lockdowns have reduced global crude demand by about 30%. Storage tanks around the world are rapidly filling, including at the key U.S. storage hub in Oklahoma.

Monday (April 20) saw oil suffering its biggest one-day price plunge ever. Reports have levels crashing about 40% to below US$11 a barrel as the industry deals with a record glut of supply. Futures contracts for May and June also fell precipitously with traders running what amounted to a fire sale due to their inability to store production. Influential petroleum sector Hedge Fund manager Pierre Andurandhas even suggested the world could well see negative prices in the coming period. “There is no limit to the downside to prices when inventories and pipelines are full,” he said in a recent Tweet.  Texas-based buyers are offering as little as $2 a barrel for some oil streams, raising the possibility that producers may soon have to pay to have crude taken off their hands.

The impact of oversupply is resulting in well shutdowns and changes in corporate planning. In the U.S., companies involved in crude exploration idled 13% of the American drilling fleet by mid-April. Here in Canada prices for Western Canadian Select dropped below zero on Monday. Producers are in crisis mode. 

For example, Husky Energy has cut its 2020 capital expenditure by an additional C$700 million and reduced production by more than 80,000 barrels per day (BPD). And, yesterday Husky told OCTANE they have now dropped their plan to sell off their network of retail gasoline stations.

“Due to the current market environment, Husky has suspended the strategic review of its Canadian retail and commercial fuels business, which consists of more than 500 stations, travel centres, cardlock operations and bulk distribution facilities,” says Husky Energy spokesperson Kim Guttormson.

Another producer, ConocoPhillips, announced that it expects to reduce production at its Alberta facilities by approximately 100,000 barrels of oil per day to 35,000 BPD by May. Company CEO Ryan Lance cited COVID-19 and general market uncertainty with oversupply and demand falling as reasons for the reduction in production.

Suncor Energy Inc. said last week that it too planned to cut output. The Calgary-based oil co reported it would reduce production at its Fort Hills oilsands by about 70,000 BPD.

Crescent Point Energy Corp. is also planning to cut. The company reported that it will slice its capital spending plan for a second time and reduced its production guidance for the year. The company lowered its capital spending to about $675 million, down from its original budget of $1.15 billion. It also lowered its annual average production forecast by 20,000 barrels of oil equivalent per day or about 15% to about 112,000 BPD for 2020.

Cathedral Energy Services Ltd. and McCoy Global Inc. both announced job cuts, reductions to executive pay and lower capital spending plans this week. Cathedral told media that it has cut its office and shop staff by 22%, while the remaining Canadian non-field staff has moved to a four-day workweek with a corresponding 20% reduction in salary.

 Analysts are forecasting that Canadian petroleum production could fall by more than one million barrels per day if market prices remain depressed.

 

 

 


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Canadian oilpatch cutbacks expected to continue despite OPEC agreement

Canadian oil wells will continue to be shut down amid weak global oil prices despite an agreement to limit production struck by OPEC and other major producers on the weekend, producers say.

The price of Western Canadian Select bitumen-blend oil rose by almost five% on Monday morning from Thursday’s close, but remained stuck below US$5 per barrel as U.S. benchmark West Texas Intermediate oil prices inched up by an equally modest amount.

Both oil prices drifted lower through the day on Monday and wound up in negative territory, with WTI down 35 cents at US$22.41 per barrel and WCS settling at US$3.96, down 43 cents or almost 10%.

“It’s all helpful but I still think we’re in a very challenging situation,” said Grant Fagerheim, CEO of Calgary-based Whitecap Resources Ltd., in an interview.

The agreement comes too late to allow a quick rebalance in the oil supply and demand market, he said, explaining that oil storage facilities have rapidly been filling while Saudi Arabia and Russia ramped up output after failing to reach an agreement to continue production limits in March.

The deal signed Sunday will result in a reduction of 9.7 million barrels per day of crude production in May and June and provides for lower reduction levels to follow.

Fagerheim said Whitecap is working on an analysis of all of its western Canadian wells to determine which are currently cash flow positive.

“If we have to pay to produce, we’ll look to suspend that production,” he said, adding shut-ins could start as soon as this weekend.

The Canadian industry has shut down operations producing about 400,000 bpd but Fagerheim said he expects that will more than double to as much as one million barrels per day _ 20% of the total _ offline over the next few weeks.

The OPEC+ deal provides some assurance and stability to markets but it doesn’t match the reduction in demand caused by measures taken to deal with the COVID-19 pandemic, said Kevin Birn, a Calgary-based oil market analyst at IHS Markit.

“The scale and the scope of this agreement is really a big deal,” he said in an interview. “It is unprecedented … but sadly, the demand destruction we’re seeing is even greater.

“What that means is this doesn’t solve the situation linked to the virus and the trajectory of the virus.”

Global oil demand is expected to shrink by about 20 million bpd _ one in five barrels of production _ in the current month, IHS says in a forecast.

Canadian producers have already shut down wells accounting for about half a million barrels of oil per day because they can’t make money at current prices, Birn added, and that trend will continue until global energy demand rebounds.

Oil producers will shut down their least profitable operations first, likely starting with heavy oil, where prices have been hit harder than light oil, said Jeff Tonken, CEO of Birchcliff Energy Ltd. and chair of the Canadian Association of Petroleum Producers.

“We’re going to have forced shut-ins because the economics don’t work,” he said, while also predicting an eventual recovery.

“What will happen is demand will come back as people start to come out of their homes and as the economy starts to move.”

Shale oil wells in the United States and Canada also produce natural gas. Tonken said a recent firming of natural gas contract prices likely results from expectations that associated gas output will fall as oil wells are shut down.

In a report updated on Sunday, Desjardins analysts said more than one million barrels per day of western Canadian oil production will probably be taken offline despite the OPEC deal.

“Some cuts are better than no cuts _ that much is clear,” the report notes.

“But when the 9.7 million bpd cut is put into the context of a 25 to 35 million bpd hit to global crude demand, it clearly is not enough.”


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How low will gas go?

Screen Shot 2020-03-24 at 12.28.39 PM“Oil markets are poised to get worse before they get better, ushering in a new era for petroleum,” U.S.-based Citi Bank said in a recent note to its clients. Already, oil is being produced below the cost of production, with prices falling for Western Canadian Select Crude to under (US) $10 (actually hit (US) $7.36) a barrel for the first time.

Simply, the petroleum market got hammered with a one-two blow, where demand has fallen off sharply and supply has increased dramatically. The result is dispenser prices that few of us have seen in recent years.

The COVID-19 concern has Canadians staying at home and working in place. This means less fuel usage for things like commuting and air travel. Less demand drives prices downward. Add to this the recent dust-up between Russia and the Saudis over OPEC production targets, whereby both parties are pumping oil like there is no tomorrow. Russia is selling at a loss as a way to build European market share and the Saudis (and UAE) are battling back with excess production to bring pressure onto Russia in a bid to get them to ratchet back well flows. The upshot is a glut of petroleum products at a time when world demand is at an all-time low.

The Russians have said they have enough reserve capital to keep up this fight well into next year. The Saudis have cash to burn, as well as low production costs, and have said they will keep up pressure till the sides get back to the bargaining table.

Here in Canada Syncrude and Suncor have scaled back maintenance work on upgraders due to COVID-19 and the companies’ inability to obtain workers for the task. The result here is that synthetic crude continues to flow at a time when levels were set to be throttled back. The result is even more capacity in the system.

The outcome is that gasoline prices have fallen and could drop even more. Some analysts predict an additional 10% to 15% decline under canopy as we move into April. A look at prices this week sees Vancouver around the $1.00 mark for a litre of gas. This is a drop from the high of $1.70 we saw last year. British Columbia is around 0.75 cents a litre. Ontario is reporting sales of 0.59 cents and Calgary motorists discovered pumps offering prices of 0.55 cents Tuesday morning. Nova Scotia is selling as low as 0.66 cents.

The bottom line is that Canadians can expect gas prices to decline further over the short term with prices in Ontario possibly coming in around the 0.60 cent mark later next month. Until Russia and OPEC makeup and play nice expect the barrel price to continue to stay low for the foreseeable future.