by Josh Siegel | May 10, 2020 12:00 AM
If history is a guide, an oil price boom is coming after the pandemic-generated crash.
While the near-term demand picture is highly uncertain, as people reconsider their travel and work habits, this latest bust, the worst of them all, is unlikely to hasten the demise of oil.
“The only way to get away from the boom-bust cycle is to get off of oil,” said Bob McNally, president of Rapidan Energy Group and the author of a book on the topic called Crude Volatility. “That’s really tough because there are no scalable substitutes. As a result, we expect a thirstier world will collide into insufficient supply, and crude prices will have to rise sharply to balance the market.”
Oil supply will take longer to return than demand as drillers shut-in a record amount of production, companies cut spending on new investments, and the U.S. shale revolution slows. Recommended For You ‘Curious statement’: Liberal law professor slams Obama claim that ‘rule of law is at risk’ after Flynn exoneration
“As demand rises and it becomes clear that producers over-cut, a roaring oil market will develop,” said Dan Eberhart, CEO of the drilling services company Canary and a donor to President Trump.
Few are expecting $100 per barrel oil, a level that was commonly reached during previous economic recoveries but hasn’t been met since summer 2014. Oil prices have increased in recent weeks, with the U.S. benchmark closing this week at $24.74 per barrel after briefly trading below zero last month for the first time. Joe McMonigle, president of the Abraham Group, an international strategic consulting firm, said he expects oil prices to reach around $45 per barrel as early as the third quarter of this year as economies are freed from stay-at-home orders.
He noted oil prices approached $80 per barrel as recently as last year.
“I hesitate to talk about $100 oil,” said McMonigle, a former Energy Department chief of staff in the George W. Bush administration. “But when the economy comes back, you will eventually get to that bust to boom cycle.”
At first glance, the outlook for oil demand is cloudy, and there are countervailing factors that might determine its future. China, one of the two biggest oil consumers with the United States, is back to rush-hour traffic levels after beating the worst of the virus.
Driving is picking up in the U.S. as nearly half of states have begun to open stores, beaches, and restaurants. But flying remains risky and is discouraged. For many, telecommuting is normal now and could become more routine in the future. Mass transit, powered by electricity, not oil, could see a hit as people avoid tight spaces. That means more cars on the roads.
“You have trends both negative or positive for demand, and it’s anybody’s guess which way that pushes demand,” said Jim Krane, energy geopolitics fellow at Rice University’s Baker Institute. “I have seen nothing that tells me there will be a permanent drop in oil demand.”
Global oil demand is not expected to reach pre-pandemic levels before the end of the year, the International Energy Agency projected last month. But after that, it expects oil demand to experience “robust” growth to 2025, absent major changes in government policies, before seeing slower growth and reaching 106 million barrels per day in 2040. The world consumed 100 million barrels per day of oil before the pandemic.
“Oil is still the only game in town when it comes to moving around the planet, and until that changes, we are going to be using it,” Krane said.
Supply is set to recover slower than demand, putting upward pressure on prices.
There will be 14 million barrels per day of crude oil production cut or shut-in worldwide in the second quarter of this year, the research group IHS Markit projected Friday. That involves a mix of government-mandated cuts in places such as Saudi Arabia and Russia and market-driven ones in the U.S., the world’s largest oil producer. There were 374 active drilling rigs in the U.S. as of Friday, 614 less than a year earlier — a level not seen since before the shale revolution.
“The biggest factor outside of demand is how U.S. shale comes back,” said Sarah Ladislaw, director of the Energy Security and Climate Change Program at the Center for Strategic and International Studies.
Shale production can be turned on and off quickly.
“The physical challenge of bringing back shale oil can be easier than people currently imagine,” said Amy Myers Jaffe, director of the Energy Security and Climate Change Program at the Council on Foreign Relations, crediting technological advances, the geology of shale, and automation.
But Jaffe said restoring shuttered wells is an “expensive proposition.” For example, North Dakota has reported a shut-in of more than a third of active wells, nearly 7,000 of them, leading to a 450,000 barrel per day production drop in the state’s Bakken shale basin. The cost of returning a Bakken oil well to production ranges from $25,000 to $50,000, according to state figures — a cumulative cost of $170 million to $340 million.
Boom and bust is how capitalist investors make money. If it is not oil, then it will be some other commodity. How else would guys like Buffet and Soros make billions while destroying the lives of others.
COVID is just another business opportunity. QE on steroids.
I think Buffet and Soros are two very different animals. Buffet actually buys into undervalued or correctly valued stocks. Buffet takes advantage of the normal distortions in an otherwise efficient market. Soros, on the other hand, doesn’t like an efficient market, he would rather be involved in insider activity that is endemic in an unhealthy marketplace.
Personally I like Buffet, and think Soros is a sack of shi….
I like Buffets candidness.
A few years ago a reporter asked him about his wind farm investments. He said the only reason he invests in wind is due to the tax credits and subsidies. He said without them, wind farms do not make economic sense.
He didn’t try to dance around the question, his response was very straightforward.
Buffet knows wind farms are built to harvest subsidies and tax credits. And he clearly understands that any wind energy the Wind Farm actually harvests is irrelevant since they can also get paid to not produce electricity under those same schemes.
Not to mention has the benefit of having the media report that you sold/bought shares of so and so sector weeks after doing so – whenever it’s convenient to buy/sell.
Buying LOW and selling HIGH is how they make their $Billions, NOT by ‘destroying the lives of others.’ Buying shares in a company affects no one except the buyer and the seller. The seller acquires capital to run or expand his/her business. The workers, who YOU say are ‘destroyed’, are paid from the profits (if any) from the business, and are not directly affected by the buying and selling of company stocks. This is all basic economics. The buyers take huge risks, having to worry about a steep and long-term down turn in the markets, causing them to lose their money. The company is not affected by the ups and downs, having already made their money when the stocks were originally sold. The stock buyers are the ones most likely to have their lives ‘destroyed’. Sadly enough, many of them do not understand the basic rule of buying and selling stocks: Buy low, and SELL high, Far too many of them get it backwards, there by ‘destroying’ their savings!
I met a guy a few years who spent a couple $mil to pick up and revitalize few old wells from a major after the last “crash.” Not long after the workover rigs were done, he as making $1 mil/day.
Greg-san:
Because of competition, any company whose raison d’etre is to, “destroy the lives of others” would soon be out of business…
Leftists are so hilarious.
Free enterprise based on the moral principle of two parties reaching a mutually agreeable and beneficial transaction without coercion…
It’s Leftist tyrants who, “destroy the lives of others.”
Thank you SAMURI, for using the proper term: “Free Enterprise”.
Leftists use the Marxist slanderous term “Capitalist”. Capital does not create itself. It takes WORK to add value.
Capital is obtained from either gainful constructive work or distructive conficatory political work. The second method is the one of which I am sure Greg would approve. You know, taxes taken from productive workers to redistribute to the chosen worthy to purchase votes.
If it talks like a communist and acts like a communist, it is a communist. First sign is use of the term Capitalist!
” a cumulative cost of $170 million to $340 million.”
No problem, we’ve got a bailout for that. Bad news is you are paying for it.
Oh, take a pill, Greg.
$25,000 – $50,000 per well is just a drop in the bucket.
Far more than that was sold in gasoline daily in my town prior to the pandemic shut in
$170m – $340m is literally small potatoes compared to the Billion$ already foisted on society with unreliable wind and solar that CANNOT eliminate the need for mining coal or drilling Oil and is just a blip when compared to the Ten$ to Hundred$ of Trillion$ proposed by the GND in just the U.S.
Interestingly distillate which which is mostly goods transport has NOT taken the hit that gasoline has. You can see this at https://www.eia.gov/petroleum/weekly/
“Interestingly distillate which which is mostly goods transport”
Dude, just say no.
??????
I think it’s going to be awhile before the price for oil recovers by any appreciable amount.
Many people who are now deeper in debt, not only in the US but in the rest of the world, because of the pandemic. These people are not going to be spending money on traveling, vacations, eating out; anything not necessary in their lives. They are going to be paying off the debt incurred over the shutdown instead. And it’s going to be a long time before the world will be using oil at the same rate as before the pandemic began.
Restaurants and resorts are going to go bankrupt and the people who work there, unemployed for a long time. Las Vegas and the state of Nevada are going to be hurting longer than the rest of the states. Those states that opened up early will not be hurt as bad as those that persist in staying closed down because of the debt incurred by the work force.
SMS: re “They are going to be paying off the debt incurred over the shutdown instead.” I beg to differ, debtors don’t pay debts, tax payers do. To wit the “stimulus checks” being handed to people based on their income bracket whether they have income or not.
People have been getting paid regardless of whether they have been layed off or not and are ready to spend. I expect some inflation this summer, which is exactly what we need.
“Oil price boom…”, you know what this means, right? David Middleton will have to go back to catting around! Whoops, wait a minute, that’s not quite right…Yes! David will have to go back to Wildcatting! That’s it! Stay sane and safe.
And here in Canada, as pipeline construction stalls, we have a true anticapitalist (Green Party leader Elizabeth May) who managed to hook media shills into helping her declare “OIL IS DEAD” whilst declaring nothing at all that will serve to replace it either as a fuel, a plastics precursor, fertilizer or an investment to help keep the health care system churning.
I’d always respected her as someone who, at the very least, earned her pay as a member of parliament. Unfortunately she can now be seen only as another zealot with a holy manifesto raised in her hand.
Unemployment skyrockets and the Greens dance.
What a disgusting spectacle is the unholy lot of them.
How can you have an oil boom when back in the early 1960s I was told by some great authorities that we would have ran out of oil 20 years ago.
Surely this stuff can’t be real oil — can it?
Maybe it disappears when I close my eyes.
From Peak Oil to Peek-a-boo Oil!
😉
tom0: It may be sorta like CO2:
Asheville, NC tied record lows last night (May 10, 2020) at 32F, I slept right through it in my tent at 3000′ not real far south of there, allegedly:
1906 – CO2 295 ppm – 32F record lo
1966 – CO2 311 ppm – 32F record lo
2020 – CO2 418 ppm – 32F record lo
So, I think what happened is we ran out of oil about 20 yrs ago but fortunately we were saved by benevolent secret wind and solar projects using biomass as cover. I think it works sorta like when no one is looking you cut down all the trees and render them into liquid fuel for transportation whilst erecting wind mills and solar panels in same clear cut forests to keep the wires live to your house. Obvious is it not??
Meiggs…that is far to inefficient. Put the windmills directly on top of the transportation, connect to the wheels and VOILA! … no need to make those liquid fuels AT ALL.
I once met a guy who actually believed that. Seriously.
Lee: Who’da thunk it? I wish I had thought of that. Appears, like cold fusion, the oil companies bought up the patents to wind powered cars and buried them deep. I wonder if I will get sued if I put a wind turbine on top of my car………..
Start to end, all bogus speculation.
Talk about boom bust?
1) Talk about variability of wind and their equipment’s short life.
2) Talk about the ineffectiveness of solar at night and during winter.
3) Talk about solar and wind’s end of life and their lack of recyclability.
4) Talk all of the land, forest and grazing along with wildlife, lost to alleged recyclables.
McNally entirely ignores just how powerful $100 dollar oil is as an oil supply enabler.
Just more green trough fantasizing trying to disguise their greed.
“4) Talk all of the land, forest and grazing along with wildlife, lost to alleged recyclables.”
About 8,000 acres of forest in tiny Massachusetts have been utterly destroyed in the past 5 years to install solar “farms.
They’re destroying approximately 4,000 acres in Virginia for a solar farm as we speak.
Courtesy of Governor Northam, a German company with money to burn on propaganda, lobbyists and compliant county supervisors.
So this is how journalism operates – do a bit of shallow research, add in an attention-grabbing headline, and out it goes. In contrast, this old guy’s opinion is that of course ‘oil’ will bounce back – it literally drives the world’s economies (but don’t tell the Greens), and for the foreseeable future there are simply no feasible substitutes. And perhaps more importantly, the virus shutdown caused a rapid and very large fall in global demand, and as we are dealing here with huge daily volumes of a physical resource the industry had no alternative but to respond by a huge reduction in supply. When global demand rises again as lockdowns end, due to a number of factors supply may not quite keep pace, resulting in a temporary price spike. So what – this is just Econ 101, plus a bit of understanding of how well this huge industry can respond to a sudden, massive shock. Thank goodness the world has plenty of oil and gas!
The only thing that compares to this is the 1986 oil crash
I don’t see the economy in general recovering that quickly, which will slow down oil price increases. A lot of people have had their savings wiped out, and gone into debt, before being able to return to work. First thing is pay down the credit card and rebuild the savings when they return to work. And they’ll be the lucky ones. Millions of jobs all over the world have disappeared forever. Between the people paying down debt, and those with no job to go back to (i.e. no paycheque, consumer spending will not increase as rapidly as some hope. Hence no sharp rise in oil prices.
Another factor is the slow “under the radar” growth of electric vehicles. According to a Bank of Canada staff analytical note https://www.bankofcanada.ca/wp-content/uploads/2019/06/san2019-19.pdf (Specifically the abstract on page 3)
This won’t be a sudden shock to oil prices, but they won’t grow as fast as expected.
That is not happening at all. You seem clueless to current events. The U.S. government is giving loans/stimulus to small business and unemployment + $600/week to the unemployed. The general population has cash in hand and is ready to spend.
P.S. electric cars are especially sh!tty in Canada’s cold weather.
“Loans” means money that has to be repayed. Businesses will be slow with capital expenditures and hiring, to pay back the loans. $600/week = $2600 month. Many people are going to struggle to meet rent/mortgage plus car payments plus groceries on $2600 per month.
As for Canadian weather, you’ve been watching too much “Nanook of the North” https://en.wikipedia.org/wiki/Nanook_of_the_North That was about the far north. The vast majority of Canada’s population (and road network) are in a thin strip along the US border. E.g. Greater Vancouver is next to the US Pacific North West; Toronto is across the lake from Buffalo, etc. Not enough snow for igloos, let alone have them last through winter. And given that Teslas have 300 to 400 miles nominal range, they’d have to take an extreme battery degradation to be unsuitable for a daily commute to work and back.
Speaking of the daily commute, companies are discovering that work-from-home is a viable option and many jobs aren’t coming back. That means less commuting, and fewer car purchases… which will be bad for Chrysler, Ford, and GM.
And Tesla and ZAP and any other EV manufacturers
I would love to know just what those who are “working from home” produce.
In my case, software.
Paul: Those working from home produce filled in time sheets just like they did before, nothing more, nothing less. And if you made below a certain amount of money (working a home or not) now you get a “stimulus check” from the gov on top of doing nothing in the first place. Not a bad gig if you can get it. Not a good deal if you are in the tax bracket that has to pay for it.
Where’s my “stimulus” check?
Walter,
Many of those loans are forgivable, and will be forgiven. In fact, many businesses are depending on that. Also, that $600/week is IN ADDITION to the regular unemployment benefit they receive. For many people that means their income is the same as when they were working. And on the WFH front, many companies are finding out their worker’s productivity starts to drop after a couple of weeks, so most of those people will be returning to the office when the lock-downs are ended. Some already are.
Robert: Who repays loans? What century are you living in???
In the current century: A penny borrowed is a penny earned.
So $100/bbl (in today’s dollars) oil would be $96/bbl IF’n in 2030 a whopping 1E+08 EVs are added to the world inventory of operating cars. Big whoop.
Do they realize how many EV cars that is? Because not just does every EV operating today in 2020 would need to be replaced in ten years (end of service life), you’re adding another 100 million more on top to get that 4% drop. I wonder if they included the mining industry demand for oil to extract and process and smelt all the minerals to metals needed for that many cars, and seems to me it would more than offset the decrease in oil to fuel consumption by the retail consumer.
It should be clearer than ever after Planet of the Humans that renewables and EVs only shifts emissions to 3rd World countries, while driving up the costs for everyone.
“The cost of returning a Bakken oil well to production ranges from $25,000 to $50,000, according to state figures — a cumulative cost of $170 million to $340 million.”
No way. How much does it cost to put a pumper in a pickup, have him go to each of his wells and turn a couple valves and light the treater? Let the wells flow for awhile and then restart the pump (restarting the pump can be done remotely at most if not all the Bakken sites….
It may well cost $25,000 or more to restart a well after a refrac but not a well that was just shut-in because of low prices…..Its been a few decades since i worked in the oilfield…maybe I’m full of BS…..
Even at $25,000 per well, that’s only 2-4 weeks production sales @ $100 per barrel (250 barrels)
As I understand it, Bakken wells produce a lot of high brine water. They may need to be circulated with fresh water before putting on line. Also, if the well is shut in during cold weather, it would be necessary to winterize the battery as part of shutting in the well. If the oil is high pour point oil additional precautions would have to be taken. These are costs that are only found in cold environments. In Texas they would just turn on the switch.
So according to this article the demand is going to go up so fast that all of the stored oil including all the tankers at sea will be used up before someone starts pumping oil, I don’t think so. There is still oil being pumped now struggling to find a home and with the very slow unwind of all these country lockdown will mean a slow increase in demand that can be very easily managed by someone with half a brain. This is just an attempt to talk up the price of oil as that directly help Donald Trump inflate the stock market which is all this is for.
Everything will come back up, the question is how long and with how much government control.
By the way folks, the disaster was not caused by the flu it was caused by government and the insane overaction to the flu.
Nah it was the coal wot dunnit-
https://www.msn.com/en-au/news/techandscience/even-if-climate-change-wasnt-happening-phasing-out-coal-is-a-no-regret-solution/ar-BB13QVeu
You just have to model and monetise these things and the problems are solved and the curves flattened.
That’s the way it goes until they come up with a vaccine or two-
https://www.msn.com/en-au/news/coronavirus/scientists-concerned-that-coronavirus-is-adapting-to-humans/ar-BB13SW98
On second thoughts perhaps we’d better hang on to the coal for a bit as the Swedes might be right-
https://www.msn.com/en-au/news/australia/past-studies-have-revealed-coronavirus-vaccines-actually-enhanced-infection/ar-BB13TJSN
A bit more with the modelling and monetising perhaps……?
1) Rocks don’t go bankrupt
2) Inventories matter
3) Commodity price fluctuation is no excuse for wholesale policy misadventures
4) Economic illiterates sometimes use that illiteracy to string policy tales for other illiterates (Snake oil salesmen need not know what all is in the elixir, they just need to have good sales technique and know their illiterate audience.)
Just don’t panic as we have more advisors with university degrees and computer modelling talents than at any time in our history. Unlike ventilators and masks there’s plenty of computers to go around. Besides at a pinch we can always average out the models and arrive at a consensus to all be relaxed and comfortable.
From the article: “Joe McMonigle, president of the Abraham Group, an international strategic consulting firm, said he expects oil prices to reach around $45 per barrel as early as the third quarter of this year as economies are freed from stay-at-home orders.”
I think so, too. Traffic is picking up around this area and other areas that are opening up their economies. Unless there is a big spike in infections, this pick up in traffic and business is going to continue.
The Wuhan virus is going to tell us how fast we can go.
Let’s do the math:
If North Dakota shut-in 7,000 wells and lost 450,000 bpd of production, the average well was producing 64 barrels per day. These were wells already near the end of their economic life and ready to be re-fracked or abandoned. Not a big deal.