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Market Sentiment Watch: The thought of a pandemic with an 18 month or longer duration, possibly characterized by multiple waves has markets on edge. So grab an extra cup of coffee and dive in.
- Jobless claims to spike near term. First the restaurants and bars closed, now Ford and GM are shuttering factories (really good car deals coming if you care) but also looking into producing ventilators. Even the casinos are closing. This will have negative impacts on gasoline, diesel and natural gas demand. It's early to say how much but it won't be small. Upstream capital cuts will send thousands to the unemployment line before tax day.
- Saudi and Russia are still at odds and MIA from the negotiating talbe. Russia again offered an olive branch yesterday, this time in the form of a comment from the Kremlin that they would like to see higher oil prices. Seems a bit late. Within minutes Saudi responded by reiterating their vow to pump at record rates in April (12 mm bopd from the ground and 0.3 mm bopd from storage we thin). Brinksmanship has been set to 11.
- U.S. rig and active frac spread counts are going to get crushed. After a brief uptick in 1Q20 for the annual upstream capex reload things are going to head back south, rapidly. Frac spreads are a little faster to react and we saw that start last week. Rigs will finish drill ops on the latest well and maybe the pad and then get stacked. There are 8 to 10 employees per shift (2 shifts) per rig plus 20 or so workers in support at the well site and the company man. Outside figure is 40 paychecks per rig though the last 20 would cover multiple rigs. For the frac spreads, you're looking at 15 per crew and 2 crews and another 20 in support. Call that 50 paychecks per spread. According to API, the industry directly and indirectly supports over 10 mm U.S. jobs. You might keep them in your thoughts when you see the counts cliff dive. This is a group that never wants a handout.
- Developing countries who are oil revenue dependent and who will need cash to fight the virus are set to lose over 85% of their oil revenues.
- The next EIA Short Term Energy Outlook in April should show another big downward revision to U.S. output . Note that we've long said EIA will miss the turn lower in U.S. production. They've shown volumes heading up and to the right well into the future for years now. And then this month's STEO cut the 2021 forecast by almost 1 mm bopd, largely due to their perception of the impact of lower prices. We again suggest to EIA that a key missing component of their model is active frac spreads and actual completions vs (modeled rig count) X (a wells per rig per month assumption) X (a new well productivity assumption) delayed by a short time lag between spud and completion but with an assumption that such wells will automatically be turned to sales. They will not. For many, they will be 15 to 20,000 foot long test tubes that will soak in their fluids, remaining unperfed and unfracced at current prices.
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- Covid Tracker sites, two we watch and find helpful:
- Maps and data.
- Graphs and data. Both are bookmarked at upper left on the site.
- Our sense is the market is waking up to the likelihood that this will not be a one and done event.
- Some antivirals are showing positive results in China and Japan. These would be available far before a vaccine.
- Rio shows solidarity with the afflicted.
- There is a growing cadre of congressman who oppose "bailouts" for the "fossil fuel" industry. Some thoughts:
- We at Z4 Research are generally opposed to bail outs ... However, moves to support key industries can take a number of forms. We've seen this with autos (loans that were paid back with interest) and we hope to see similar forms for industries like the airline industry (not just cash to an industry that likes to buy shares but not bolster it's balance sheet). Or they can take the form of protective tariffs to prevent deliberate dumping and damaging of domestic interests. Or they can take the form of forced pooling of entities as we saw with the financial crisis of 2008. Or perhaps some combination of all three would be appropriate for industries deemed vital to national security interests.
- ... and while the oil and gas in the U.S. is much maligned ... But it's cleaner than oil and gas in other countries. Growth in the States has led to modern history lows for oil net imports (imports less exports) and natural gas is well into net export territory. The industry directly employs 10's of thousands of workers and indirectly supports multiples more. It pays taxes. You might not think so as some have said it doesn't but it pays massive amounts of production taxes which are crucial for local economies (everything from playgrounds to services to schools). And it keeps America's lights on. It's not just what goes into your gas tank. It heats homes, cooks food, and it powers that Tesla. You can't just flick a switch to replace it and if you try by, for instance, implementing a frac ban and half mile nationwide setback, the low prices you enjoy now will slam higher. We read Bernie's plan and it offered no solutions, just an abrupt, price spiking shut off of an American industry that would benefit less clean foreign options. Moreover, if you attempt to go all electric you'll be looking at massive costs to replace package units, water heaters, and gas cooktops. And that leads us to point #3.
- ... there is no quick replacement for natural gas. Natural gas is key to heating and power in the U.S. Here are some basic numbers regarding just the U.S. electrical generation pie followed by an annual generation table to share with friends or people you want to bore/annoy on the internet or at the appropriate social distance in your currently empty super market aisle:
- Nukes were 18% of generation in the States last August and are generally stuck at ~ 20% on an annual basis. We use August as that's generally the summer peak for demand (sometimes it's July). This aging fleet of reactors has been uprated multiple times. I did a lot of work on this at my time at Jefferies and many were on their 3rd uprate back then and as such, the industry has pretty much hit a generation wall. There is no near term possibility of significant further expansion here (I know Biden is a fan of mini reactors and that's interesting) but there is nothing that could be done fast enough to warrant not viewing natural gas as vital as per above.
- Coal was 23%. As we have previously detailed the coal fired generation industry is in the dying process. Sites are being shutter monthly and no new meaningful additions are being attempted. Early in the 21st century this was half of U.S. generation but it's dirty in a lot of ways and I've worked on clean coal concepts and a better word for them is schemes. They are simply not start to finish clean.
- Hydro is variable each year with a lot depending on snowfall. In the summer months, when U.S. electricity demand is at peak, hydro generation is often down from spring levels. Last August it was just 5% of generation. As a generation source, hydro is generally not being expanded.
- Wind was 5% of generation last August. Wind is set to grow rapidly and 3 of our largest positions are now wind tied (turbines, blades, and towers). But it can't come close, any time soon, just talking logistics here, just physical realities, to replacing natural gas. We also note that generation by wind turbines in the summer months is generally lower than the rest of the year.
- That brings us to solar. We have a lot of hope for solar. Solar generation has grown rapidly in recent years and will continue to through the decade and beyond. But solar is tiny and that rapid growth came from a small base level. Utility scale solar power in the U.S. was just under 2% of generation last August. And the same logistics for growing it that apply to wind apply it. It simply cannot replace natural gas any time soon.
- Sidebar: We have seen a number of fear mongering stories over the last week regarding renewable investments. These stories have ranged from pointing out global social distancing and it's impact of carbon footprints as a reason for coming slack renewable project completion to estimates of billions in projects simply going up in smoke. We have seen no such phenomenon. We have gotten updates in the last two weeks from a number of wind and solar participants and supply chain disruptions range from minor to not yet a factor. We have seen no project cancellations. These are large, bid projects, with months of planning involved, done with PTC safe harbor considerations in mind. They may see some push out in the calendar due to worker considerations (transportation, installation) but to date we have not seen that and to suggest that billions in planned investment will go up in smoke due to Covid-19 is more fear mongering than reality based. We do see the potential for further subsidy time period extensions and for some governmental stimulus to actually increase renewable investment. We see these stories as feeding into a certain market panic mania underway which is now presenting in the form of far cheaper than 2019 type multiples as names come in from recent highs in shoot first, understand later behavior.
- You'll note that oil isn't in the table ... that's because in the U.S. we basically don't use oil to any great extent for generation.
- Meanwhile, natural gas accounted for easily the largest wedge of August 2019 generation (proxy for summer) at 44% of total and averaged 38% last year.
- Here's a table with a number of years of generation data. We've boxed certain portions for emphasis:
In today's post please find:
- the oil inventory review (better than expected on the headline numbers, strong oil exports (for now) and implied record demand for gasoline for this week of the year),
- the natural gas preview (small draw expected, likely bigger draw next week). We may see a small build before withdrawals are over. This is normal as the storage pull season winds down. We are on track to land within or now long forecast 1,800 to 2,000 Bcf range. Expect strong gas fired demand in the shoulder and with the start of cooling season but know that commercial demand is now in jeopardy due to facility closures.
- the capex dashboard (adds several more companies to the list of names slashing budgets),
- and some other odds and ends.
Ecodata Watch:
- We get jobless claims at 8:30 am EST (F = 220,000, last week was 211,000). This is going to zoom higher in coming weeks,
- We get Philly Fed at 8:30 am EST (F = 8.0, last read was 36.7),
- We get leading indicators at 10 am EST (no forecast, last read was 0.8%).
In Today’s Post:
- Holdings Watch
- Commodity Watch
- Oil Inventory Review
- Stuff We Care About Today - Capex Dashboard, Free Posts This Week
- Odds & Ends
Holdings Watch:
ZLT
- Yesterday's Trades: NONE as we continue to await a more rationale market.
- The Blotter is updated.
Commodity Watch:
Crude oil fell $6.58 (24.4%, the 3rd largest single day drop on record) yesterday to close at $20.37 despite EIA reporting a better than expected set of weekly data. Please see the EIA Inventory Review section below for details (at the moment U.S. inventory levels are fine for time of year). Early this morning crude is trading up 12% to ~ $22.80.
- OPEC+ Watch: OPEC chatter is unusually light.
- Russia Watch: Russia's finance ministers sees oil revenues some $40 B light to plan now and his country's budget in deficit. Ya know it's like he didn't see this reaction coming which is odd because most saw a deal with OPEC ... or this.
- Mid Cush Watch: Discount to WTI now $4.16 in April and showing a gradual improvement back into premium territory by December.
- Colorado Watch: San Miguel County enforces shelter in place ordinance with no cases in the county yet. In case you are wondering this is far and away from the Wattenberg. We do have to wonder what effect such shelter in place ordinances, should they spread, have on drilling and completion ops.
Natural gas closed off $0.125 at $1.604 in a more modest volume session, moving lower with crude, the poor market backdrop, and a warmer forecast out of Maxar. This is a 24.5 year prompt month low and for once we look forward to getting out of the withdrawal season and into the shoulder when the negative read on heating demand is not present. A warmer than normal spring for natural gas would be welcome. No change to our thoughts of a landing this spring between 1,800 and 2,000 Bcf. No changes to our thoughts that this is not an end of world type spring trough storage level. At current prices, electricity generation is going to record to epic record. While we expect commercial facility demand reductions to play into electric generation needs we expect that to be distributed across the entire generation sector save nuclear with coal likely taking the brunt of the hit. We are watching closely for signs of weakness in LNG and Mexico export volumes. We expect volumes headed south from Canada to be at record lows this year. We continue to expect that we have seen the current cycle lows for U.S. production with last November's numbers. In the early morning hours gas is trading flat.
Natural Gas Storage Preview
Street is at - 3 Bcf for today's report. This is rounding error and we could see the first injection of the season today. Next week we expect a larger withdrawal.
- Last Week: - 48 Bcf
- Last Year: - 91 Bcf
- 5 Year Average: - 63 Bcf
Oil Inventory Review
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Stuff We Care About Today
Capex Dashboard
- We do not own all of these names, please see our Positions page and blotter for holdings.
Other Stuff
Free Posts This Week:
Odds and Ends
Analyst Watch:
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