March 26, 2020
Welcome back. Today's Smart Brevity count: 1,289 words, 5 minutes.
Situational awareness: As I noted yesterday, here's a good list of organizations helping restaurant workers facing economic jeopardy from the COVID-19 crisis.
🎵Yesterday marked the birthday of the late Aretha Franklin, who opens today's newsletter with this beautiful song...
1 big thing: Trump's limited opening with the Saudis
The White House faces a difficult but not impossible task as it seeks to convince Saudi Arabia not to unleash a flood of oil into the already oversaturated market.
Why it matters: The COVID-19 pandemic is crushing global oil demand. The economic hit to the oil industry — already underway in the U.S. — will be even tougher to emerge from if the Saudis proceed to boost supply to over 12 million barrels per day next month.
Driving the news: Trump officials are boosting diplomatic efforts around supply management following the collapse of the Saudi-Russia output limiting deal, which steepened ongoing price declines.
- They're emphasizing the Saudi's new role as the rotating leader of the G20 as a leverage point, per administration officials and this Wall Street Journal piece.
What they're saying: Look at how the State Department wrote its summary of Secretary Mike Pompeo's call this week with Saudi Crown Prince Mohammed bin Salman.
- It says Pompeo stressed that as the G20 head and "an important energy leader," the Saudis have a "real opportunity to rise to the occasion" and "reassure global energy and financial markets" amid global economic uncertainty.
- And a senior administration official tells me: "We believe that Saudi Arabia cares deeply about the stability of the global oil market and we are in close communication with the Kingdom about policies that can improve conditions for economic growth."
What we're watching: President Trump will take part in a G20 videoconference this morning on COVID-19 response, so we'll be watching for signs of whether oil policy came up.
The big question: Will U.S. efforts sway the Saudi's posture in their price war with Russia?
- "The Saudis see the G20 presidency as a coming-out party that finally enshrines the kingdom as a global powerbroker," Rice University energy and geopolitics expert Jim Krane tells me.
The intrigue: Krane notes that while Trump officials are appealing to their sense of responsibility that comes with the role, the administration is an imperfect messenger.
- "The problem is, the Trump administration's 'America First' agenda explicitly rejects the role Trump is now asking the Saudis to play."
But, but, but: There's still an opening. Oil analyst Ellen Wald says the Trump administration has some leverage in its effort to push for restraint.
- "If it's a top priority for the president, he has to let the Saudis know that not cutting oil production will weaken the U.S.-Saudi relationship, because the relationship is what the Saudis value most," says Wald, a Saudi expert.
- The Saudis have motivations to consider the price war's effect on the U.S. and the broader financial system, she adds.
- Via Twitter, Wald pointed out that the Saudi crown prince has an interest in the state of U.S. and global business, citing investments by the Saudi's huge sovereign wealth fund in companies based in the U.S. and elsewhere.
Go deeper: U.S. pressures Saudi Arabia to give up oil price war with Russia (S&P Global Platts)
2. The market is simply flooded already
Regardless of whether the Saudis alter their plans, the global oil market is seeing an astonishing buildup of supplies with nowhere to go amid the unprecedented demand collapse.
What they're saying: Analysts' research notes have become dramatic reads in these tragic times, with the latest entries coming via new Goldman Sachs and IHS Markit notes.
- Goldman now sees demand falling by 10.5 million barrels per day this month and 18.7 million barrels per day in April (and that's not even the biggest estimate out there).
- Goldman and others point out that it's all creating a huge physical problem. "Current global output levels cannot be sustained throughout the second quarter because oil storage capacity will fill up," IHS Markit said in a note Thursday.
Threat level: "[W]e believe that any potential agreement between the US/Saudi and Russia to freeze or reduce output is too little too late as it would take months to impact inventories globally and would be dwarfed by the current demand losses," Goldman analysts say.
- "In fact, we believe there is likely insufficient capacity globally to even accommodate the April supply surge targeted by Saudi/Russia/UAE."
The bottom line: Production in some locations will simply have to be halted. IHS sees the supply-demand imbalance creating a surplus in the first half of this year of 1.8 billion barrels, which exceeds their estimate of available storage capacity.
- "Production is going to have to be reduced or even shut in. It is now a matter of where and by how much," IHS' Jim Burkhard said in a note.
3. The coming shale patch pain
A new report from the Dallas Fed offers a sobering look at how much the oil price collapse and falling demand are going to batter the U.S. industry.
Driving the news: Their survey of oil companies showed that many need oil prices far higher than today's low prices to profitably drill new wells.
- A separate part of their quarterly report shows that for some companies in some regions, prices are now below what's needed to profitably operate existing wells.
Why it matters: Shale producers — both majors and independents — are planning to sharply pare back spending. Steep job losses loom in the drilling services industry.
What's next: The chart above helps explain why U.S. production is slated to begin falling, though it'll take a while.
- "We expect the recent steep decline in prices to start showing in U.S. oil production data by July, as [well] completion activity is sticky over the very short term, primarily due to hedging," Barclays analysts said this week.
- The Energy Information Administration sees U.S. production starting to slide in Q3, and fall to an average of 12.66 million barrels per day next year compared to roughly 13 million this year.
- Their next forecast will show up in early April and could show even deeper projected declines.
4. The big picture: COVID-19 and natural gas
The coronavirus is set to alter global natural gas markets that are already in the midst of transformation, per a new Center for Strategic and International Studies analysis.
What's next: Via CSIS's Nikos Tsafos, trends to watch are...
- Demand: It'll be affected, but the extent depends on "how much is activity falling due to GDP, how much is gas privileged or disadvantaged relative to other fuels, and how will people adapt their behavior to protect their health."
- Production: Watch three key global suppliers as prices remain depressed — Russia, Qatar and the United States. "[G]as faces a tough 2020 with declining demand and prices and no supplier with a clear impetus to reduce production. We can expect things to get worse for suppliers until someone blinks."
- Infrastructure: Illness risks are already affecting some petrochemical and LNG projects, though there's still incentive to build as fast as possible to start earning returns. "[S]afety concerns might slow things down, and projects might come online later than expected," he writes.
- Investment: It's likely that fewer projects get green lights in 2020. The longer-term is cloudier and location-specific. In some advanced economies, stimulus plans may "point away" from gas in favor of climate efforts. "But in places around the world where gas use could advance a country’s low-carbon pathway, we can expect power plants, pipelines, and port facilities to get an extra push."
- Market structure: The crisis could spur changes in contract and pricing practices. One place to watch is China, a mammoth importer of LNG. "[A] prolonged crisis will test Chinese buyers and their willingness to abide by terms conceived and created in a market long before they were participants."
5. Catch up fast: pipelines, Tesla, climate
Litigation: "A federal judge on Wednesday ordered the U.S. Army Corps of Engineers to conduct a full environmental review of the Dakota Access pipeline, nearly three years after it began carrying oil despite protests by people who gathered in North Dakota for more than a year." (AP)
Coronavirus: "Tesla CEO Elon Musk said Wednesday that the company’s factory in Buffalo, New York will open 'as soon as humanly possible' to produce ventilators that are in short supply due to the spread of the COVID-19 pandemic." (TechCrunch)
Electric vehicles: "Fears that electric cars could actually increase carbon emissions are a damaging myth, new research shows." (BBC)