With the passing of yesterday’s holiday in the US, the country’s car driving season is now officially over. It is possible that this summer’s oil price recovery is too.

That is the subject of ES’s column today, which reflects on renewed signs of frailty in the oil price.

Data Drill, meanwhile, sticks with oil and looks at the US shale sector. Signs of life are just about visible. But don’t get carried away. A significant rise in the rig count is needed before the shale patch is thriving again.

Thanks for reading. Let us know your thoughts and ideas at energy.source@ft.com. If this has been forwarded to you, please sign up for the newsletter here. — Derek

Covid-19 is still calling the oil market’s shots

The oil market’s recovery has stalled. The surge in consumption this summer that helped drag crude from its slump is petering out. Supply, including from the Opec+ group whose record-breaking cuts also helped clean up the glut, is rising again. The combination is sapping market optimism, reminding traders that oil’s brutal year has months left on the calendar.

Brent, the international benchmark, was trading around $41.50 a barrel in London on Tuesday morning, down from over $46 a barrel a few weeks ago. WTI, the US marker, fell through $40 last week and was trading for around $38.50 a barrel.

These aren’t dramatic drops — especially after the sub-zero market tumult in April. But they leave crude prices drifting in a down trend that suits no one: too low to meet the fiscal needs of big oil export-dependent countries such as Saudi Arabia; too low to sustain a major recovery in battered oil-producing regions of North America; but not low enough to cajole consumers to drive, fly or burn oil as they once did.

Demand in the US, the world’s biggest market, has been flatlining since July. Gasoline consumption last week was 7 per cent below its level a year earlier, and lower than the week before. The last time American drivers burnt so little petrol in late August was in 1998. And with Labor Day over, peak summer driving season has now passed.

Line chart of Thousand barrels a day showing The bounceback in US oil demand has petered out

This slowdown was to be expected, said Cuneyt Kazokoglu, a director at consultancy FGE. The first phase of the demand recovery was strong because it came off such a low base (with global consumption down year-on-year by about 20m barrels a day in April, or about a fifth of the total). The next gains will be more modest. By year-end, he predicts, global demand will still be down by at least 5m b/d.

READ ALSO  Apple makes unexpected concession on 30% App Store fees

“From here it will be a more lengthy process,” he said.

China is also importing less crude oil — and may not pick up the pace of buying again until prices fall further, say analysts. Reflecting the weakening of demand in its most crucial market, Saudi Aramco cut the price of oil for Asian consumers in October.

“If China does not boost again its oil imports soon, this could be interpreted as a warning sign that even heavy industry-propelled economies, that traditionally come back more quickly than others in times of crisis, are feeling the strain,” said Paola Rodríguez-Masiu, senior oil market analyst at Rystad Energy, a consultancy.

Over to you, Opec

If consumers can no longer be relied on to drive the market recovery, producers will have to do their bit to keep propping up prices.

Yet production from Opec — whose record-breaking cuts alongside Russia helped bring the oil market back from the brink this summer — is now rising again.

Line chart of Million barrels a day showing Opec production: down a lot, up a bit

The Opec cutters (which exclude Iran, Libya and Venezuela) produced 21.9m barrels a day in August, up almost 2m b/d from June, according to Refinitiv. Some of this was an agreed increase. But overproduction from the United Arab Emirates, a loyal Saudi ally which produced almost 250,000 b/d above its target in August, was definitely not expected. Nor did Saudi Arabia plan for Iraq, Opec’s second-biggest producer, to pop into view seeking an exemption to its cuts next year.

These signs of dissent on cuts are bad timing, given traders’ renewed worries about demand.

Saudi Arabia is not impressed. King Salman spoke to President Vladimir Putin of Russia yesterday about their co-operation — a sure sign the kingdom is again homing in on the performance of its partners in the Opec+ cuts deal.

“At this stage, the main focus should be on ensuring that compliance remains high,” said Bassam Fattouh, an expert on Opec policy and director of the Oxford Institute for Energy Studies.

That will be especially important while the virus still hangs over the market, especially as the northern hemisphere’s winter nears. Covid-19 will remain oil’s wild card, said Bill Farren-Price, a director at consultancy Enverus and veteran Opec-watcher.

“Saudi Arabia can do what it wants on the supply side, but all the Opec compliance in the world can’t make scared people get on aeroplanes or drive to workplaces they don’t want to be in.”

US gasoline demand in the last week of August this year was the lowest in 20 years © Luke Sharrett/Bloomberg

(Derek Brower)

Commodities Global Summit

The FT Commodities Global Summit on September 28 — September 30 is the pre-eminent event for senior executives, traders and financiers and the 2020 agenda will address the topics that matter most to the industry. Speakers include Petrobras Chief Executive Officer Roberto Castello Branco, Vitol Group Chief Executive Officer Russell Hardy, and Gunvor Group chief financial officer Muriel Schwab. Register here.

READ ALSO  Brexit lessons as Swiss vote on future Brussels relations

As the global economy slowly returns to life after the coronavirus pandemic, the biggest issue of the age continues to loom large: climate change. Ignoring global warming is not an option and to succeed, traders will have to play a part in the shift to cleaner forms of energy.

Data Drill

The oil market may be going through another moment of weakness — but no one can blame the American shale patch this time for pumping too hard, too fast. After sliding beneath 10m barrels a day in June, production has risen but remains well beneath the record highs it struck earlier this year, according to Genscape, a division of Wood Mackenzie that monitors daily pipeline and field-level crude flows. By the end of last week, output was slightly beneath the level it hit just before Hurricane Laura swept into the Gulf of Mexico.

Line chart of Thousand barrels a day showing US oil production's rocky recovery

Still, signs that the shale patch is twitching back to life are growing visible. The frac spread count — the number of crews out completing, or bringing on stream, previously drilled wells — is rising steadily, according to Primary Vision, a data provider. The problem is that it fell even more quickly during the crash earlier this year. The frac spread count increase in August “surpassed our expectations”, said analysts at Tudor, Pickering, Holt & Co, an investment bank. The “solid uptick” was a “positive sign for the beleaguered subsector and we expect incremental increases through (at least) October. We could see US onshore frac spread count reach 125-130 spreads in October vs. a May trough of ~70-75.” Still, the analysts said they don’t expect a “truly salubrious US frac market” until 2022 or beyond.

Line chart of Frac spread count showing US fracking activity is rising

Despite the rise in the frac spread, the low rig count stands in the way of a shale oil output recovery. More completion activity can keep tapping the stock of drilled-but-uncompleted wells, the so-called “Duc count”. But longer-term growth depends on more drilling. Ian Nieboer, a managing director at Enverus, says about 300 rigs would be needed across the sector for output to start rising consistently again. The rig count grew last week — but by just one extra oil rig, to 181. It is down by 75 per cent since this time last year. Said Mr Nieboer:

“It’s encouraging to see more wells being brought into production, but until the rig count grows at a much healthier clip, the recovery will not be on.”

Line chart of US rig count (oil and gas) showing The rig count has bottomed out but there is little cause for optimism

Power Points

READ ALSO  Peugeot and Fiat offer van concessions to win EU nod for $50bn merger


The pressure on the energy industry to clean up its act is intensifying. Despite this year’s drama, 2020 is already breaking records for shareholder engagement on climate change.

As global warming has shot up the agenda, so too have investor motions for companies to take greater responsibility for their impact on the environment, according to Goldman Sachs’s latest “Carbonomics” report. And oil and gas producers are in the eye of the storm.

First off, momentum is growing:

  1. Year-to-date climate-related resolutions outstrip last year’s on an annualised basis. Europe (unsurprisingly) is leading the charge.

  2. The number of these resolutions tabled by investors has almost doubled since 2011.

  3. The percentage voting in favour has tripled over the same period — rising to a record 33 per cent.

Second, suppliers are facing significantly greater pressure than consumers:

  1. Half of all proposals target producers (ie: oil, gas, utilities and coal) versus 30 per cent hitting the sectors that account for most of the final energy consumption.

  2. The number of resolutions tabled at oil and gas companies is roughly equal to financial services, consumer cyclical and defensives, utilities and basic materials combined. 

Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London, and Gregory Meyer in New York.

Via Financial Times