Ralph E. Davis Associates (RED) President Steve Hendrickson highlights encouraging signs that have led to the recent improvement in crude oil prices.
Over the last couple of weeks oil prices have improved significantly from the historic lows of April and WTI futures prices are approximately $40/bbl for the rest of 2020. For the now, the supply/demand balance is improving - how did we get here and what's next?
OPEC Cuts Maintained — OPEC+ agreed to remove about 10 million barrels per day (MMbbl/d) of oil production from the market in April and, over the weekend, agreed to extend those cuts.
U.S. Production Declining Rapidly — I've seen estimates that U.S. oil production is down about 2 MMbbl/d due to shut-ins, curtailments and natural decline. Some of this production can be restored relatively easily, but I expect natural decline may account for about half of that (more on U.S. natural declines later).
Development Of New Oil Supply Has Virtually Stopped — The U.S. rig count has plummeted, particularly in unconventional oil plays.
"Over the long run, prices may improve due to the cumulative effect of natural declines and low investment, but meaningful near-term price improvement won't occur until world economies have reopened in a sustainable way and economic activity is restored."
The supply response is a necessary and predictable outcome of the tremendous loss of oil demand caused by the COVID-19 pandemic. Over the long run, prices may improve due to the cumulative effect of natural declines and low investment, but meaningful near-term price improvement won't occur until world economies have reopened in a sustainable way and economic activity is restored. How are we managing the pandemic as economies move to reopen?
The Virus Is Unchanged — We still lack a treatment or vaccine; we know that certain groups are at high risk for bad outcomes.
Successful Strategies Exist — Social distancing, extensive testing and contact tracing have been successful in many locales in greatly reducing the spread, flattening the curve and buying time.
New Cases Continue To Increase Globally — The peak in new cases around the world has yet to be seen and developing countries are experiencing significant growth in new cases.
Outside Of New York Region, U.S. Cases Continue To Rise — Excluding New York, New Jersey and Pennsylvania, total new cases in the U.S. continue to rise. Many states' counts are falling, but several populous states (California, Texas, Michigan, North Carolina, Arizona, for example) show steady increases or recent spikes.
The next few months will reveal if we can successfully navigate the challenge of reopening our economies while keeping the spread of the virus in check. At this point, I'd say the jury is still out.
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Steve Hendrickson is the President of Ralph E. Davis Associates, an Opportune LLP company. Steve has over 30 years of professional leadership experience in the energy industry with a proven track record of adding value through acquisitions, development and operations. In addition, Steve possesses extensive knowledge of petroleum economics, energy finance, reserves reporting and data management, and has deep expertise in reservoir engineering, production engineering and technical evaluations. Steve is a licensed professional engineer in the state of Texas and holds an M.S. in Finance from the University of Houston and a B.S. in Chemical Engineering from The University of Texas at Austin. He currently serves as a board member of the Society of Petroleum Evaluation Engineers and is a registered FINRA representative.
