Covid-19 and Russia Collusion to Kill Shale!

By David Middleton – Re-Blogged From WUWT

As the Democrat-media-fueled Covid-19 panic continues to batter the global economy, Russia thinks they see an opportunity to kill the evil capitalist “shale” players…

Russia Yanks A Leg From U.S. Shale’s Three-Legged Stool

David Blackmon Contributor, Energy

For the last two-plus years, the U.S. shale industry has been able to continue its oil boom thanks to the existence of a figurative 3-legged stool of support. Those three legs have been easily identifiable:

*The ability to legally export crude oil to other countries;
*An ongoing license to build pipelines and conduct fracking operations; and
*The continuation of the OPEC+ deal limiting exports by other oil producing nations.


So long as all three legs of that stool remained in place, crude prices have remained healthy enough to allow shale operators to continue drilling wells, increase overall U.S. production and for the most part remain fairly profitable. But, as with any stool, the removal of any one of the legs upsets an undeniably delicate balance, potentially spelling disaster for anyone sitting atop it.

On Friday, Moscow yanked one of the three legs from the stool by refusing to agree to additional export cuts that had been unilaterally proposed by the OPEC member nations on Thursday without Russian representatives in the room. Crude prices immediately collapsed, experiencing their worst day in more than 5 years with a drop of 10%.

[…]

On Thursday the OPEC nations proposed additional cuts that would have taken an additional 1.5 million barrels of oil per day off of the market, 1 million of which would have been born by the OPEC members, with the remaining 500,000 in cuts obligated to Russia and its fellow non-OPEC participants. On Friday, though, Russian Energy Minister Alexander Novak returned to Vienna and informed the group that his country would not agree to any further cuts.

[…]

Forbes

Since trading opened this morning, both Brent and WTI are down another ~$9/bbl. As of 0700 CDT, Brent is at ~$35.50/bbl and WTI is at ~$32.10/bbl. Unfortunately for Russia, this Communist plot is unlikely to accomplish much of anything beyond devastating the Russian economy, even more than it’s already been devastated.

[…]

Manish Raj, chief financial officer at Velandera Energy, told Marketwatch that “Russia is certainly betting that price crash will cause U.S. production to crash, helping restore its dominance.” If that is really Moscow’s thought process, it is likely to be disappointed. Saudi Arabia already attempted a similar strategy to kill U.S. shale, flooding the market with crude in 2014 to create an enormous glut and drive down prices in an effort to reclaim market share.

Such a strategy demonstrates a misunderstanding of American bankruptcy laws. While the crash in oil prices that began in late 2014 did ultimately result in hundreds of shale producers declaring Chapter 11 bankruptcy, the net result of that process is that most of those companies reorganize themselves and come back with far less debt load. The strategy also fails to recognize that most producers have already put hedges in place for most of their equity production through the remainder of 2020 and beyond.

[…]

David Blackmon is an independent energy analyst/consultant based in Mansfield, TX. David has enjoyed a 39-year career in the oil and gas industry, the last 23 years of which were spent in the public policy arena, managing regulatory and legislative issues for various companies, including Burlington Resources, Shell, El Paso Corporation, FTI Consulting and LINN Energy.

Forbes

When Saudi Arabia tried this stunt in 2014, it did force hundreds of U.S. oil companies into bankruptcy, some of which never recovered. However, most of those companies emerged from bankruptcy with their debt effectively erased. While U.S. crude oil production declined by about 1 million bbl/d from July 2015 through October 2016, by the time OPEC initiated talks with Russia about coordinated production cuts in August 2017, U.S. crude oil production had recovered to its July 2015 level of about 9.5 million bbl/d.

Furthermore, most U.S. producers layered on hedge positions when oil was around $60/bbl. Hedges effectively lock in prices. As of February 2020, U.S. oil production hedge positions were near an all-time high:

Swap dealer positions: Short positions held by swap dealers accounted for 32% of the open interest for the WTI futures contract as of January 21, 2020, slightly less than the all-time high of 33%, reached in 2018 (Figure 4). Initiating a short position, or selling a futures contract, enables the holder to lock in a price today for the physical delivery of a commodity at some future date. Oil producers commonly use swap dealers to hedge their future production. Swap dealer short positions increased to 30% of the WTI open interest in mid-December, when WTI prices increased to more than $60/b. This price level, according to a survey of U.S. exploration and production companies conducted by the Federal Reserve Bank of Dallas, is sufficient to generate enough cash flow from operations for the majority of firms to cover capital expenditures. The increase in swap dealer short may have increased, in part, because U.S. producers hedged some of their expected 2020 production at about $60/b.

U.S. EIA

Figure 1. Hedge positions and WTI oil price. Source: U.S. EIA

While a protracted Russian price war to gain market share will hurt the U.S. oil industry, cause many bankruptcies, destroy a ton of equity, wipe out 10’s (if not 100’s) of thousands of jobs and possibly even cause Permian Basin oil production to decline long enough for idiots to declare it dead… It will fail. Russia won’t gain market share and U.S. oil production will quickly recover, even if many of the oil companies won’t.

The self-inflicted damage has already begun:

Russian Ruble Plummets Amid Oil Market Chaos
The ruble hit a four-year low against the U.S. dollar as oil prices crashed 30% overnight.

The Russian ruble plummeted almost 10% overnight, falling to its lowest level in more than four years, as oil prices crashed following the breakdown of the Russia-Saudi Arabia pact to limit production.

The ruble was trading at a low of 74.9 to $1 on Monday morning, after another wild start to the week for financial markets. Russia’s rejection of a renewed round of oil production cuts in the OPEC+ format at a crunch meeting in Vienna on Friday shocked the global energy markets and has prompted analysts to talk of an “oil price war” between two of the world’s largest energy suppliers.

Benchmark Brent crude fell 30% to $33 a barrel when trading opened on Asian markets following the weekend, the sharpest one-day loss in almost three decades.

Falling oil prices put the Russian ruble under pressure, as Moscow still relies on energy exports for a large portion of its budget. The so-called budget breakeven rate is $50, while profits on oil sold about $42 a barrel are funnelled into Russia’s swelling National Welfare Fund (NWF).

With prices below those levels, Russia will either have to run into its substantial coffers to fund day-to-day government spending or borrow more.

[…]

The Moscow Times

Russia, the country, needs oil prices above $50/bbl to breakeven. These tangentially United States, the country, don’t have a breakeven price. Our economy isn’t dependent on oil export revenue. And U.S. oil producers now have much lower breakeven prices than we did in 2014.

RYSTAD ENERGY RANKS THE CHEAPEST SOURCES OF SUPPLY IN THE OIL INDUSTRY

May 9, 2019

In a major turnaround, North American tight oil is emerging as the second cheapest source of new oil volumes globally, just shy of the Middle East onshore market.

[…]

Tight oil – such as onshore shale oil in the US – has witnessed an impressive turnaround over the last few years. In 2015, North American shale ranked as the second most expensive resource according to Rystad Energy’s global liquids cost curve, with an average breakeven price of $68 per barrel. The average Brent breakeven price for tight oil is now estimated at $46 per barrel, just four dollars behind the giant onshore fields in Saudi Arabia and other Middle Eastern countries.

[…]

Rystad Energy

Figure 2. Breakeven prices and resource bases. Source: Rystad Energy (Click to enlarge)

Russia’s average operational breakeven price is $13/bbl higher than U.S. “shale”. Furthermore, their resource base (width of the bars in Figure 2) is much smaller than the Middle East and U.S. “shale”.

Russia just brought a knife to a gunfight… A dull knife. So… Why is Russia doing this?

The Tell
OPEC price war one of three worst things that could hit virus-wracked markets, JPMorgan strategist says

Published: March 9, 2020 at 11:39 a.m. ET
By Steve Goldstein

In these coronavirus-wracked markets, there would be three, hypothetical really bad events, according to John Normand, head of cross-asset fundamental strategy at JPMorgan.

*One would be a large-scale shutdown of the U.S.

*Another would a second wave of virus infections in the China.

*And the third would be an OPEC+ price war.

Oops. That price war led to a 1800-point, or over 7%, drop in the Dow Jones Industrial Average in opening trade.

Normand said “the timing of this weekend’s shift seems somewhat random except to those who view it as President Putin’s attempt to complicate the U.S. economic outlook ahead of 2020 elections.’

[…]

MarketWatch

Vladimir Putin may be evil, but he isn’t stupid. He has to know that Russia can’t win this price war… But he can use it to interfere in our elections, hence: Covid-19 and Russia collusion to kill shale! Film at 11.

Film at 11

To those unfamiliar with American idiomatic expressions and/or too young to remember when the news cycle wasn’t 24/7…

Film at 11: Back in the “old” days, a breaking news story would be reported on the 7:00 PM (Eastern Time) news broadcast and would often be accompanied with the phrase “film at 11.” The film of the news story was still being processed and would be shown on the 11:00 PM news broadcast. At 7:00 PM, you would get a breathless CNN-style headline, hooking you into watching the 11:00 PM news to see the film of the event, usually a CNN-style nothing-burger.

While Covid-19 is far from a CNN-style nothing-burger, the panic is wholly unjustified. The Democrat-media complex continue to report that Covid-19 is 20 times as deadly as the common flu and far more contagious.

On the basis of a case definition requiring a diagnosis of pneumonia, the currently reported case fatality rate is approximately 2%.4 In another article in the Journal, Guan et al.5 report mortality of 1.4% among 1099 patients with laboratory-confirmed Covid-19; these patients had a wide spectrum of disease severity. If one assumes that the number of asymptomatic or minimally symptomatic cases is several times as high as the number of reported cases, the case fatality rate may be considerably less than 1%. This suggests that the overall clinical consequences of Covid-19 may ultimately be more akin to those of a severe seasonal influenza (which has a case fatality rate of approximately 0.1%) or a pandemic influenza (similar to those in 1957 and 1968) rather than a disease similar to SARS or MERS, which have had case fatality rates of 9 to 10% and 36%, respectively.2

The efficiency of transmission for any respiratory virus has important implications for containment and mitigation strategies. The current study indicates an estimated basic reproduction number (R0) of 2.2, which means that, on average, each infected person spreads the infection to an additional two persons. As the authors note, until this number falls below 1.0, it is likely that the outbreak will continue to spread. Recent reports of high titers of virus in the oropharynx early in the course of disease arouse concern about increased infectivity during the period of minimal symptoms.6,7

Fauci et al., 2020

Epidemiologists measure contagion with a statistic called the reproduction number, denoted as “R0.” It estimates the number of people each patient is likely to infect. Bloomberg rounded up R0 estimates for the coronavirus and other infectious diseases from the WHO and CDC and found that while the coronavirus’s R0 of 2.8 makes it more contagious than the seasonal flu (1.3) or Ebola (1.9), it is much less contagious than smallpox (4.8) or the measles (15.0). A separate New York Times analysis estimates it is also far less contagious than chickenpox.

Yet even these comparisons may overstate the transmission risk. As WHO Director-General Tedros Adhanom Ghebreyesus explained on Monday: “We don’t even talk about containment for seasonal flu – it’s just not possible. But it is possible for Covid-19.” He elaborated: “We have never seen before a respiratory pathogen that’s capable of community transmission but at the same time which can also be contained with the right measures. If this was an influenza epidemic, we would have expected to see widespread community transmission across the globe by now and efforts to slow it down or contain it would not be feasible.” WHO officials have also observed that the coronavirus appears to be much less contagious than the flu in their respective incubation periods, i.e., before symptoms appear.

Fisher Investments

When the dust settles, Covid-19 may turn out to be comparable to the seasonal flu, which annually kills 12,000 to 61,000 Americans, but doesn’t trigger market panics.

And… There are already indications that Red China’s economy is starting to rebound.

It is too soon to know exactly how the coronavirus will impact economic growth. There will almost certainly be some kind of hit, with most forecasts suggesting slowing growth. But, and this is key, it looks to be temporary. Already, various purchasing managers’ indexes hint at inventories falling while order backlogs rise—fuel for a rebound. In China, there are already signs of this. One Chinese online travel agency noted hotel bookings soared 40% in the week ending 3/1 from the prior, while flight demand skyrocketed. In a hard-to-refute sign the country is getting back to work, nitrogen dioxide pollution is back. The gas, a byproduct of utility output and factory emissions, largely vanished amid the twin impact of the Lunar New Year holiday and coronavirus-related shutdowns—which NASA captured in a recent image of the week. We aren’t cheering pollution, but it seems a pretty tangible sign of a rebound. Of course, there are many other pollutants—and China’s economy is mostly services these days, not factories. But it still seems relevant to note, in our view.

Fisher Investments

Nearly 2 weeks ago, Apple CEO Tim Cook said that they were already reopening factories in Red China.

As New Coronavirus Cases Slow In China, Factories Start Reopening
February 29, 2020

As new cases of coronavirus infection slow in China, the country is gradually getting back to work. Authorities and businesses are taking a range of measures: Local governments are chartering buses for workers. Some companies are buying out entire hotels to house quarantined staff. A temporarily shuttered movie studio is even loaning employees to factories that are short on labor.

[…]

NPR

Good news in China: Factories reopen as new coronavirus cases drop
By JOE MCDONALD
ASSOCIATED PRESS |
MAR 05, 2020

Factories are gradually reopening in China months after the new coronavirus that first emerged there upended daily routines.

The country, after many arduous weeks, appeared to be winning its epic, costly battle against the new virus. The World Health Organization said there are about 17 times as many new cases outside China as in it.

[…]

Shanghai-traded stocks have rallied nearly 12% since hitting a bottom on Feb. 3. They’re just 1.6% away from wiping out the last of the losses they’ve sustained since the new virus began to spread late last year.

[…]

Chicago Tribune

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