The Daily Dose

-Some oil market players see opportunity in times of crisis.

-New OPEC+ restraint in play today, but it’s restraint from great heights.

Adapt or die. That may be the mantra that separates the energy companies that collapse in the quarantine economy and those that endure. The severe downturn has already forced rig company Diamond Offshore and US shale player Whiting Petroleum into bankruptcy and majors such as BP and Chevron are avoiding putting capital into a risky market. From Texas to North Dakota, lawmakers and executives alike are pondering everything from bailouts to buyouts to keep afloat. While some market players are closing down to build up a shield, others see opportunity. A new market environment requires new ways of thinking.

Brent crude oil, now in the July contract, was trading near $27 per barrel at 8 a.m. ET, up some 2% from the previous close. Trading could be on the thin side as European and other major economies take time off for Labor Day commemorations.

An agreement among parties to an OPEC+ curtailment agreement went into force on Friday, sidelining some 9.7 million barrels per day from a market dealing with an unprecedented glut. Some in the industry have argued the restraint is too little, too late. Others, meanwhile, point out that curtailment levels come from a great height. The original agreement collapsed March 6 amid Russian reluctance to embrace mandates because of temporary factors such as interim demand destruction in the quarantine economy. Perhaps reflecting that sentiment, Algeria’s energy ministry, which also holds the rotating OPEC presidency, was quoted as saying “the gradual rise in oil demand due to the resumption of world economic activity on the one hand, and the reduction in supply on the other hand, will lead to a gradual stabilization of the oil market and an upward trend in prices.” Outside of OPEC, and it’s market factors that are driving the reduction in supply, not voluntary restraint. And while cuts are in force, April output was up 1.61 million bpd from March levels, prices remain stubbornly low and storage levels are approaching the rim.

Market conditions are grim, with crude oil prices sitting far below the break-evens for drillers and even further below the level needed for some major producers such as Saudi Arabia to balance their books. That’s prompted energy majors to slash how much capital they’re putting into the industry. US supermajor Chevron on Friday joined a growing list of companies announcing cuts to capital expenditures, to the tune of $2 billion. The restraint, Chairman and CEO Mike Wirth said in a statement, may be lasting.

“Financial results in future periods are expected to be depressed as long as current market conditions persist,” he stated.

The various players in the free market are in competitive survival mode, with most trimming spending by around 20% in line with the traditional playbook of wait-and-see. While desperate times call for desperate measures, a novel approach to the market downturn may be supportive. In studying behavior, success breeds mimicry as those players trying for a win must do what works or fall by the wayside. We don’t know what success looks like in this market, however, so the playbook of mimicry may be akin to lemming behavior. With that in mind, some players are getting creative.

“When an industry goes through extreme circumstances like this, it does throw up opportunities for those that have the balance sheet strength to pursue them,” Peter Coleman, the CEO and managing director of Australia’s Woodside Petroleum said in a statement to investors on Friday.

Buy the dip. In a conference call coinciding with the company’s annual meeting, Coleman was quoted as saying that Woodside might be in a position to buy up any assets left on the editing floor in the current economy. Elsewhere, US refiners are looking at new ways of using old things, jet fuel in this case. According to Argus, jet fuel production in PADD 1 last week went into negative territory for the first time in 20 years.

“Negative production means finished jet fuel was repurposed as feedstock or blendstock,” Argus reported. “Options include hydrotreating jet fuel and blending it with diesel, the highest margin product.”

If what you are doing now no longer works, try something different to gain an edge over the competition.


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