May 13th, 2020 – At the Root of It

Why is the price at the gas pump going up again?

Source: https://gasprices.aaa.com/national-gas-price-average-pushes-more-expensive-by-six-cents

Prices are rising, but not anywhere near where they were pre-coronavirus. The national average gasoline price bottomed out at the end of April following the free-fall of crude oil prices. The regional stock levels in the South are well supplied at the moment, cushioning an increase in demand now that states are starting to open again.

To illustrate the impact of travel on gasoline prices, regular increased vacation travel can be seen in 2018 and 2019 by a bump in prices in the warmer months, and that’s just people packing up to go on vacation. Gasoline prices will be directly tied to how many people are out on the road in your local area, but you shouldn’t see it rise more than 5-10 cents in the next couple weeks with the current trends.

Is the price of oil still negative?

Source: https://tradingeconomics.com/commodity/crude-oil

No, and despite all the buzz they were only negative for one day (April 20th) while traders scrambled to find oil storage before the May contract closed on the 21st.

The “price of oil” on the news ticker is what purchasers are physically agreeing to pay for the next month’s oil delivery, which changes right up until the contract settles around the 20th of the month)

Thanks to optimism from the economy opening up and OPEC/OPEC+ following through on reducing supply, oil is back to where it landed late-March (after the COVID tumble) near $25/bbl.

However, based on current supply continuing to outpace demand, don’t be shocked if we see another wild swing around May 18th before the June contract settles May 19th. The market is short-sighted at the moment with only the next twelve months being traded heavily, signaling investors have little faith in trying to gamble with predictions beyond then. More optimistically, Goldman Sachs is predicting $51 oil in 2021 and demand to outpace supply by the end of May.

It will be a game of cat and mouse for oil producers and OPEC as a waves of demand (from the economy opening) cause resulting waves of supply as producers respond to increased prices (which would then lower prices again….and the cycle continues).

How are energy companies handling this Crisis?

Right now, roughly 1.7 million barrels a day (or ~14%) of US production is expected to be shut-in by June due to low prices and an abundance of oil. Reports are that many big players in the Permian Basin are looking for at least a few consecutive days above $25/bbl before bringing more back online, but a more likely threshold is $30 due to operating margins reported prior to coronavirus.

A large number of leases also only allow 60 days of cessation of production before the lease expires (which would cause the oil companies to have to re-lease each owner’s minerals; time-consuming, expensive, and sometimes impossible), so some companies may be bringing on wells to avoid the risk of that happening. A “produce it or lose it” paragraph in most leases. However, legal teams are working through if coronavirus-event shut-ins count as “force majeure” (when external forces cause production to cease, like pipeline maintenance) rather than voluntarily not bringing the well back online, which would allow more leniency in most lease terms. But lease interpretation is gray on a GOOD day, let alone in this upside-down time. This will be an interesting trend to follow.

Over 80% of oil and gas companies are trading at distressed levels right now and 140 companies are expected to file for bankruptcy protection this year alone. Chesapeake Energy laid off 13% of its workforce in April and is the next giant in line to fall to chapter 11. The energy industry is seeing the same job loss percentages as “non-essential” services, even though most (if not all) oil and gas extraction has been considered “essential” and uninterrupted by government mandates. This drives home how integrated energy is to society as a whole.

The goal of this new series is to break down the items influencing the industry into bite-size, entry level news bits to keep you in the know without needing to be an expert. New posts every Wednesday. Please send any questions or topics you’d like explained on the blog to info@pecantreeog.com, comment below here, or join the discussion our Facebook page!