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Has oil peaked?

Last month, the world’s 4th largest oil company—BP—predicted that the world will never again consume as much petroleum as it did last year. So, have we finally hit peak oil? And if so, what does that mean for our economy and our world?

There was fierce controversy in the first decade of this century over claims by petroleum geologists and energy commentators that peak oil was imminent (I was a figure in that debate, writing several books on the topic). Most of those early claims were based on analysis of oil depletion and consequent supply constraints. BP, however, is talking about a peak in oil demand—which, according to its forecast, could fall by more than 10 percent this decade and as much as 50 percent over the next 20 years if the world takes strong action to limit climate change.

Source: PeakOilBarrel.com; production in thousands of barrels per day.

Numbers from the US Energy Information Administration’s Monthly Review tell us that world oil production (not counting biofuels and natural gas liquids) actually hit its zenith, so far at least, in November 2018, nearly reaching 84.5 million barrels per day. After that, production rates stalled, then plummeted in response to collapsing demand during the coronavirus pandemic. The current production level stands at about 76 mb/d.

Many early peak oil analysts predicted that the maximum rate of oil production would be achieved in the 2005-to-2010 timeframe, after which supplies would decline minimally at first, then more rapidly, causing prices to skyrocket and the economy to crash.

Those forecasters were partly right and partly wrong. Conventional oil production did plateau starting in 2005, and oil prices soared in 2007, helping trigger the Great Recession.

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Analysis: World has already passed ‘peak oil’, BP figures reveal

The world has already passed “peak oil” demand, according to Carbon Brief analysis of the latest energy outlook from oil major BP.

The 2020 edition of the annual outlook reveals – albeit indirectly – that global oil demand will not regain the levels seen last year. It adds that demand could soon fall rapidly in the face of stronger climate action – by at least 10% this decade and by as much as 50% over the next 20 years.

The latest outlook was delayed by six months so that it could reflect the unprecedented impact of the coronavirus pandemic. The delay also reflects BP’s plans, set out over the course of this year, to reach net-zero emissions by 2050 – as an “integrated energy company”, rather than an oil major.

This means that alongside its conservative “business-as-usual” scenario – in which demand for gas continues to rise indefinitely – BP has also looked at the effect of stronger climate action. In its “rapid” and “net-zero” scenarios, coal and oil see fast declines, while gas peaks by 2025 or 2035.

Although the net-zero focus is new, Carbon Brief analysis shows the outlook continues the trend of previous editions, by cutting the prospects for fossil fuels while raising the bar for renewables.

‘Peak oil’

Global oil demand has doubled over the past 50 years, reaching around 100m barrels per day in 2019, equivalent to an annual energy consumption of 192 exajoules (EJ).

In earlier editions of the BP outlook, global oil demand was expected to continue rising steadily. Indeed, successive editions had raised the outlook for oil, shown in blue lines in the chart below.

By 2018, BP’s outlook started to foresee an end to the upwards march for oil, with demand peaking by the mid-2030s. But the downwards revision in this year’s edition is much more dramatic (red lines), showing demand having already peaked in 2019, with large potential downside risks.

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The Debt Crisis Is Mounting For Oil Economies

The Debt Crisis Is Mounting For Oil Economies

Dubai. Abu Dhabi. Bahrain. And, of course, Saudi Arabia. The two emirates this year issued debt for the first time in years. So did Bahrain. Saudi Arabia stepped up its debt issuance. The moves are typical for the oil-dependent Gulf economies. When the going is good, the money flows. When oil prices crash, they issue debt to keep going until prices recover. This time, there is a problem. Nobody knows if prices will recover.

In August, Abu Dhabi announced plans for what Bloomberg called the longest bond ever issued by a Gulf government. The 50-year debt stood at $5 billion, and its issuance was completed in early September. The bond was oversubscribed as proof of the wealthiest Emirate’s continued good reputation among investors.

Dubai, another emirate, said it was preparing to issue debt for the first time since 2014 at the end of August. Despite the fact the UAE economy is relatively diversified when compared to other Gulf oil producers, it too suffered a hard blow from the latest oil price crash and needed to replenish its reserves urgently. Dubai raised $2 billion on international bond markets last week. Like Abu Dhabi’s bond, Dubai’s was oversubscribed.

Oversubscription is certainly a good sign. It means investors trust that the issuer of the debt is solid. But can the Gulf economies remain solid by issuing bond after bond with oil prices set to recover a lot more slowly than previously expected? Or could this crisis be the final straw that tips them into actual reforms?

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The End of Oil is Near, or Maybe Not

The cover of the September/October 2020 issue of Sierra magazine states “The End of Oil is Near”.  The corresponding story “The End of Oil?” was paralleled with a recent segment on Democracy Now.  I think that is wishful thinking.  To the extent that oil demand goes down in the future, it will go down because people can’t afford oil distillates at the price producers need to produce the corresponding oil.

The “The End of Oil?” article describes weak oil demand in recent years although it should be stated that global oil consumption increased over 5 million barrels/day from 2015 to 2019.  A major factor for weak oil demand growth in recent years is the increasing level of inequality in the U.S. and world.  There is an increasing population that can’t afford to buy oil distillates, or the devices that use them.  Oil distillates offer the ability to avoid manual physical effort which people tend to select when they can afford to.

“The End of Oil?” article emphasized the increase in global oil production in recent years.  Most of that production increase was associated with unconventional oil resources such as shale oil in the U.S. and oil sands in Canada.  The problem with those unconventional oil resources is that they are considerably more expensive to produce compared to conventional oil.  Conventional oil production is declining over much of the globe which has forced oil companies to move to unconventional resources.

The author describes oil majors, like ExxonMobil and Chevron, as getting into the shale oil business in recent years.  That is not a wise business decision but due to the lack of new conventional resources to exploit.

…click on the above link to read the rest of the article…

 

Today’s Energy Predicament – A Look at Some Charts

Today’s Energy Predicament – A Look at Some Charts

Today’s energy predicament is a strange situation that most modelers have never really considered. Let me explain some of the issues I see, using some charts.

[1] It is probably not possible to reduce current energy consumption by 80% or more without dramatically reducing population.

A glance at energy consumption per capita for a few countries suggests that cold countries tend to use a lot more energy per person than warm, wet countries.

Figure 1. Energy consumption per capita in 2019 in selected countries based on data from BP’s 2020 Statistical Review of World Energy.

This shouldn’t be a big surprise: Our predecessors in Africa didn’t need much energy. But as humans moved to colder areas, they needed extra warmth, and this required extra energy. The extra energy today is used to build sturdier homes and vehicles, to heat and operate those homes and vehicles, and to build the factories, roads and other structures needed to keep the whole operation going.

Saudi Arabia (not shown on Figure 1) is an example of a hot, dry country that uses a lot of energy. Its energy consumption per capita in 2019 (322 GJ per capita) was very close to that of Norway. It needs to keep its population cool, besides running its large oil operation.

If the entire world population could adopt the lifestyle of Bangladesh or India, we could indeed get our energy consumption down to a very low level. But this is difficult to do when the climate doesn’t cooperate. This means that if energy usage needs to fall dramatically, population will probably need to fall in areas where heating or air conditioning are essential for living.

…click on the above link to read the rest of the article…

North Dakota blues: The legacy of fracking

North Dakota blues: The legacy of fracking

When oil drillers descended on North Dakota en masse a decade ago, state officials and residents generally welcomed them with open arms. A new form of hydraulic fracturing, or “fracking” for short, would allow an estimated 3 to 4 billion barrels of so-called shale oil to be extracted from the Bakken Formation, some 2 miles below the surface.

The boom that ensued has now turned to bust as oil prices sagged in 2019 and then went into free fall with the spread of the coronavirus pandemic. The financial fragility of the industry had long been hidden by the willingness of investors to hand over money to drillers in hopes of getting in on the next big energy play. Months before the coronavirus appeared, one former oil CEO calculated that the shale oil and gas industry has destroyed 80 percent of the capital entrusted to it since 2008. Not long after that the capital markets were almost entirely closed to the industry as investor sentiment finally shifted in the wake of financial realities.

The collapse of oil demand in 2020 due to a huge contraction in the world economy associated with the pandemic has increased the pace of bankruptcies. Oil output has also collapsed as the number of new wells needed to keep total production from these short-lived wells from shrinking has declined dramatically as well. Operating rotary rigs in North Dakota plummeted from an average of 48 in August 2019 to just 11 this month.

Oil production in the state has dropped from an all-time high of 1.46 million barrels per day in October 2019 to 850,000 as of June, the latest month for which figures are available. Even one of the most ardent oil industry promoters of shale oil and gas development said earlier this year that North Dakota’s most productive days are over. CEO John Hess of the eponymous Hess Corporation is taking cash flow from his wells in North Dakota and investing it elsewhere.

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CHART OF THE WEEK: The Surprising Drop In U.S. Crude Oil Production

CHART OF THE WEEK: The Surprising Drop In U.S. Crude Oil Production

U.S. crude oil production experienced a surprising drop last week, even though domestic demand for oil and petroleum products increased.  This came as a surprise to some energy analysts.  Furthermore, the IEA, International Energy Agency came out with a forecast for global oil demand to fall 8.1 million barrels per day in 2020.

I have to say, this is terrible news coming from the IEA.  Just last month, the IEA stated that global oil demand could fall to 7.1 mbd (million barrels per day), but only recently updated their forecast for an 8.1 mbd decline in 2020 due to “gloomy airline travel.”

Actually, we don’t really know what global oil demand will look like by the end of the year.  There are way too many variables.  Even though the Fed and central banks are planning to pump in more stimulus plans over the next few months, the negative SNOWBALL EFFECT of all the closed stores, unemployment, commercial real estate armageddon, collapse in airline travel, supply chain disruptions, and so forth, will likely impact oil demand to a greater degree by the end of 2020 and into 2021.

Another CURVEBALL to hit the United States is the coming collapse in U.S. Shale oil production.  While some companies have curtailed production, and are now bringing some of it back online, total U.S. crude oil production surprisingly declined to 10.7 mbd last week.

U.S. crude oil production reached a peak of 13.1 mbd in late February, right before the global contagion and shutdown of economies.  It fell to a low of 10.5 mbd in mid-June, then rebounded to 11.0 mbd for the next two months.  However, in the lasted EIA, U.S. Energy Information Agency weekly report, U.S. oil production fell from 11.0 mbd to 10.7 mbd last week.

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Chevron Shares Slide After Recording Historic Quarterly Loss

Chevron Shares Slide After Recording Historic Quarterly Loss

Chevron Corporation reported a loss of $8.3 billion for the second-quarter 2020, the worst quarterly decline in a generation, and warned: “COVID-19 significantly reduced demand for our products and lowered commodity prices.” 

Chevron lost $1.59 per share on an adjusted basis while recording revenues around $13.49 billion. In the same quarter last year, the oil giant earned $2.27 per share on $36.32 billion. 

The earnings bloodbath was mostly due to a collapse in demand for the company’s energy products and a 60% YoY plunge in its average price per barrel of oil and natural gas liquids. h/t Bloomberg 

The quarterly loss was also due to a massive write-down of $1.8 billion in energy assets. The company fully impaired its $2.6 billion Venezuela operations from its books following U.S. sanctions. 

Chevron shares slid 3% on the earnings announcement. 

“The past few months have presented unique challenges,” said Michael Wirth, Chevron CEO, in a statement.

 “The economic impact of the response to COVID-19 significantly reduced demand for our products and lower commodity prices. Given the uncertainties associated with economic recovery and ample oil and gas supplies, we made a downward revision to our commodity price outlook, which resulted in asset impairments and other charges,” said Wirth. 

Chevron warned, “demand and commodity prices have shown signs of recovery, they are not back to pre-pandemic levels, and financial results may continue to be depressed into the third quarter of 2020.” 

Despite the considerable loss, Wirth claimed the company would “protect the dividend, invest for long term value, and maintain a strong balance sheet.”

But, it is hard to believe Chevron can justify maintaining its dividend at such a high cost with the economy now reversing and demand for energy products likely to falter in the back half of the year. 

Peak oil in Asia Update June 2020 (part 1)

Peak oil in Asia Update June 2020 (part 1)

Fig 1: Asian oil consumption is around 5 times higher than production

The production decline after the peak in 2015 is very modest. The size of the gap between consumption and production is mainly determined by consumption growth rather than by production decline. Will the Corona virus stop the gap growing?
Let’s have a look at which Asian countries consumed how much oil over the years

Fig 2: Asian oil consumption by country

Total Asia-Pacific oil consumption grew from 26.2 mb/d in 2009 to 36.2 mb/d in 2019 or by 10 mb/d This is net growth consisting of 11.6 mb/d gross growth (out of which 5.8 mb/d in China and 2 mb/d in India) and 1.6 mb/d gross decline (600 kb/d in Japan).

Fig 3: Subgroup with different trends

The subgroup in Fig 3 grew oil consumption at 330 kb/d pa after 2009 until 2017. Then countries above the dotted line (7.2 mb/d in 2019) peaked while the other countries below the dotted line (5.8 mb/d in 2019) continued to grow at 160 kb/d. The net effect was a flat oil consumption for 3 years.

Fig 4: Asia Pacific consumption by fuel

We see how important Diesel is. Fuel oil use is much lower than before the 2nd oil crisis in 1979. Naphta and other fuels are mainly used in the chemical industry.

Asian oil consumption growth is dominated by China and India.

Fig 5: Peak oil in China

Fig 6: China fuel consumption by type

While recent consumption curves in the above graphs look quite smooth, annual changes reveal a more complex picture with varying growth and even decline rates over time and in different countries.

Fig 7: Asian oil consumption growth and decline (gross)

In the last 5 years gross growth came down from 1.6 mb/d to 950 kb/d, dominated by China and India.

China’s oil consumption grew by a whopping 1.1 mb/d in 2010 as a result of a 2009/10 stimulus package amounting to almost 6% of GDP (estimated at RMB 2 Tr). https://treasury.gov.au/publication/chinese-macroeconomic-management-through-the-crisis-and-beyond/2011-01-chinese-macroeconomic-management-through-the-crisis-and-beyond/4-chinas-stimulus-package

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How Saudi Arabia Caused The Worst Oil Price Crash In History

How Saudi Arabia Caused The Worst Oil Price Crash In History

  • Saudi Arabia made good on its promise to flood the market with oil after the collapse of the previous OPEC+ deal in early March.
  • The Kingdom’s oil exports jumped by 3.15 million bpd to 11.34 million bpd in April.

Saudi Arabia made good on its promise to flood the market with oil after the collapse of the previous OPEC+ deal in early March, exporting a record 10.237 million barrels per day (bpd) in April 2020, up from 7.391 million bpd in March, data from the Joint Organisations Data Initiative (JODI) showed.  

Total oil exports from Saudi Arabia, including crude oil and total oil products, also soared in April – by 3.15 million bpd to 11.34 million bpd, mostly due to the surge in crude oil exports, according to the data released by the JODI database, which collects self-reported figures from 114 countries.    

Production at the world’s top crude oil exporter also jumped in April—to over 12 million bpd, at 12.007 million bpd, the database showed.

After flooding the market with oil in April and contributing to the oil price crash, OPEC’s de facto leader and largest producer, Saudi Arabia, agreed that same month to a new round of OPEC+ cuts in response to the demand crash and plunging oil prices. Saudi Arabia had to reduce its oil production to 8.5 million bpd in May and June under the OPEC+ deal for removing 9.7 million bpd of collective oil production from the market. 

According to OPEC’s secondary sources in the latest Monthly Oil Market Report (MOMR), Saudi Arabia slashed its crude oil production in May to the required level of 8.5 million bpd.  

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Oil Market Heading For Months Of Deficit

Oil Market Heading For Months Of Deficit

The oil market is set for a deficit from August onwards, even after OPEC+ eases the current cuts that are up for a tentative extension through July, Rystad Energy analysts said on Friday.

Assuming that global demand recovery continues in the coming months, the oil market will still be in deficit even after the OPEC+ group relaxes the current cuts from 9.7 million bpd to 7.7 million bpd, as currently planned, Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, said, as carried by Oilfield Technology.

“That will ensure a fundamental support for prices, while also spurring a quicker reactivation of curtailed US oil production, and eventually frac crews ending their holidays early,” Tonhaugen said in a note.

“Indications show that a bit more than 300 000 bpd from shut US production is actually coming back online already from June as a result of the current price levels,” he said.

Some U.S. producers have already restarted some curtailed production as prices have rallied in recent weeks and as they need the cash from operations, regardless of how little.

The market deficit coming this summer, however, doesn’t mean that there will be a global oil supply crunch, because inventories and floating storage have yet to begin depleting.

“So, even if demand exceeds supply for a while, that does not mean that we really have a problem to source oil. Oil is there, lots of it, waiting to be drawn from storage facilities,” Rystad Energy’s Tonhaugen said.

Improving global oil demand and faster-than-expected production curtailments from outside the OPEC+ pact are set to push the oil market into deficit in June, according to Goldman Sachs. Yet, there is little room for an oil price rally in the near term because of the still sizeable oversupply of crude oil and refined products, Goldman Sachs said in a note in the middle of May.

Earlier this week, Russia’s Energy Minister Alexander Novak said he expected a shortage in the oil market in July.

Is EIA Data Disguising A Disastrous Decline In U.S. Shale?

Is EIA Data Disguising A Disastrous Decline In U.S. Shale?

The Trump administration claims that the U.S. is “transitioning to greatness,” and that energy companies are going to see “massive gains.” U.S. Secretary of Energy Dan Brouillette says there is “stability” in the oil market, and that economic activity will “explode” on the other side of the pandemic.


Dan Brouillette✔@SecBrouillette

Thanks to the leadership of President @realDonaldTrump, the transition to greatness is well underway, and our economy along with our U.S. energy companies are going to see massive gains on the other side of this pandemic.

Embedded video

Meanwhile, back in reality, U.S. oil production continues to decline as drillers shut in wells and cut back spending. Output has already declined by 1.1 million barrels per day (mb/d), and more losses are likely. New data from Rystad Energy predicts U.S. oil production declines of roughly 2 mb/d by the end of June.

“Actual production cuts are probably larger and occur not only as a result of shut-ins, but also due to a natural decline from existing wells when new wells and drilling decline,” Rystad said in a statement.

Energy expert Philip Verleger, in an article for Energy Intelligence reports that the magnitude of output declines is much larger. His latest research shows that production as of May 10 is down by almost 4 million bpd from its peak as the below chart shows.

Source: PK Verleger LLC

To be sure, the U.S. government is doing quite a bit to try to bailout the oil industry. A new report finds that some 90 oil and gas companies will benefit from the Federal Reserve’s corporate bond buying program. The Trump administration is also quietly reversing environmental protections on the oil and gas industry.

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Has Demand For Oil Already Peaked?

Has Demand For Oil Already Peaked?

Oil prices continue to rise on the prospect of a rebound in fuel demand as economies begin to reopen.  But there is a large difference between oil demand rising from recent lows and actually growing relative to pre-COVID-19 trends. In other words, demand destruction on the order of nearly 30 million barrels per day (mb/d) may have been brief, but we are a long way from a 100-mb/d oil market. 

In fact, some are wondering whether the world will ever get back to 100 mb/d of oil demand. Even oil executives have their doubts. Royal Dutch Shell’s CEO Ben van Beurden recently suggested that a rebound is unlikely, even looking out beyond 2020. “We do not expect a recovery of oil prices or demand for our products in the medium term,” he said.

“We basically have a crisis of uncertainty. Uncertainty about demand, about prices,” van Beurden said in a video address when presenting first quarter results at the end of April. “Maybe even uncertainty about the viability of some of our assets given all of the logistical issues we have.”

BP’s CEO Bernard Looney largely admitted the same thing. The COVID-19 pandemic could entrench certain societal changes – more teleworking, less commuting, less flying – that could permanently erode a portion of consumption. “It’s not going to make oil more in demand. It’s gotten more likely [oil will] be less in demand,” Looney said in an interview with the FT

“I don’t think we know how this is going to play out. I certainly don’t know,” Looney said. “Could it be peak oil? Possibly. Possibly. I would not write that off.”

Not everyone agrees. ExxonMobil’s chief executive Darren Woods recently said that the long-term trends “have not changed.” 

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Oil Price Crash Was Inevitable

Oil Price Crash Was Inevitable

The oil price crash was inevitable. 

To understand why we have to review a bit of history.

In 2013, I began warning of the risk to oil prices due to the ongoing imbalances between global supply and demand. Those warnings fell on deaf ears.

Nobody wanted to pay much attention to the fundamentals at a time when near-zero interest rates were pushing banks, hedge funds, and private equity firms, to chase the “yield” in the energy space. Naturally, with money flooding into the system, companies were forced to drill economically unproductive wells to meet investor demands, which drove supplies higher.

Disclaimer

This week’s #MacroView is a broader commentary on the more general issues of the oil market. However, given this backdrop of what oil prices will likely remain suppressed far longer than most currently imagine, some opportunities exist in the energy space.

We recently added positions in Exxon (XOM), Chevron (CVX), and the SPDR Energy ETF (XLE) to our portfolios. We believed the companies offered significant value before the crisis, and offer even more due to the sell-off in oil.

Based on our discounted cash flow model for XOM and CVX, we think both companies are 25% undervalued. The model assumes very conservative earnings projections for the next three years and a low EPS growth rate after that. In addition to trading at a steep discount, we think their strong balance sheets put these companies in a prime position to purchase sharply discounted energy assets in the months ahead.

These stocks, and the sector, will be volatile for a while, but we intend to add to these positions in the future and potentially hold them for a long time.

Now, for the rest of the story.

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WTI Crashes To 19 Year Low As Trading Reopens; S&P Futures Slide

WTI Crashes To 19 Year Low As Trading Reopens; S&P Futures Slide

After a relatively drama-free weekend, futures have started off the new week lower by about 0.4%, trading at 2850, down 20 points from Friday’s CTA inspired and momentum-driven meltup which appears to be reversing as algos realize they have frontrun a rebound in not just 2021 earnings but also 2022 and 2023.

However, just like last week, it is commodities and specifically oil where the deflationary puke is taking place, with WTI tumbling over 5% at the open, and sliding to $17.30, down more than $10 from last Monday’s post OPEC+ kneejerk reaction higher and the lowest price since November 2001,

The ongoing crash in oil which OPEC+’s agreement to cut 9.7mmb/d in output last weekend has failed to halt, takes place as Crude prices in the US oil capital are getting dangerously close to zero. According to Bloomberg buyers bidding for crude in landlocked sections of Texas, ground zero of the shale revolution, are offering as little as $2 a barrel for some oil streams, a precipitous markdown from a month ago. And, as discussed here on various occasions, the plunging value of physical barrels is raising the possibility that Texas producers may soon have to pay customers to take crude off their hands.

Negative prices already hit more obscure corners of the North American oil market amid a bearish trifecta of collapsing demand, swelling supplies and limited storage capacity. AS we reported at the end of March, the first U.S. grade to bid under zero was a small landlocked crude stream known as Wyoming Asphalt Sour, which went for negative 19 cents a barrel last month.

Meanwhile, in Texas prices are heading in that direction. A subsidiary of Plains All American Pipeline bid just $2 a barrel for South Texas Sour on Friday, while Enterprise Products Partners LP offered $4.12 for Upper Texas Gulf Coast crude this week, according to Bloomberg.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
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Olduvai II: Exodus
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