Brown on Business

November 23-29, 2020

By Wesley Brown
wesley@dailydata.com

Big Oil is in Big Trouble

One of the biggest business stories that no one is talking about in 2020 is Big Oil.

But this week, the mountain of problems facing the oil industry came to a head at the November meeting of the fragile oil cartel known as Organization of the Petroleum Exporting Countries (OPEC). 

Before the world ever knew anything about the novel coronavirus that causes SARS-CoV-2, Russia and the Saudi Arabia-led OPEC had allied in recent years to try undercut the U.S. newly-minted role as the world’s largest oil producer.

No longer dependent on high-priced foreign oil, discoveries of premium oil in shale plays in West Texas, Appalachia, South Dakota and Louisiana over the past decade, and the reboot of the oil spill-tainted Gulf of Mexico brought many oil drillers and producers back to U.S. soil. However, the fight between Russia and OPEC to control international crude oil prices has led to certain unintended consequences.

For example, at the fall meeting of OPEC on Wednesday (Nov 17), OPEC Secretary General HE Mohammad Sanusi Barkindo provided a troubled overview of the oil patch heading into 2021 after the cartel’s landmark deal to cut global oil output by 10 million barrels failed to lift oil prices amid the ongoing pandemic.

Noting the impact of COVID-19 on international oil demand, Barkindo dire appraisal of the OPEC’s current situation predicts that a second wave of coronavirus cases Europe could to erase any recent oil price gains and cause Brent crude in London and West Texas Intermediate in New York to collapse further.

“The COVID-19 pandemic shows no sign of abating, ripping through regions, countries and populations as we head into the northern hemisphere winter,” Barkindo. “Although the announcement of various COVID-19 vaccines with over 90% efficacy rates, including Russia’s Sputnik coronavirus vaccine, has given a shot in the arm to the economic and oil demand outlook, offering some hope going forward.

“Evidently, the large fiscal stimulus packages remain supportive, and vaccines offer hope, but the benefits of the latter will take time to trickle through to the real economy, and oil demand growth,” concluded the cartel leader.

Barkindo also noted that global economic forecast has declined 4.3% in 2020, which stands in stark contrast to growth of 3.1% predicted at the start of the year, an overall drop of 7.4%. That forecast has caused OPEC to also revise its 2020 outlook for oil demand to a negative 9.8 million barrels a day (mb/d), a drop of 300,000 barrels per day from only a month ago. Compared to January’s forecasted growth of 1.2 mb/d, the oil cartel now expects an astounding drop of 11 million mb/d in 2020.

“The recent revisions are due to the slow pace of the economic recovery and recent COVID-19 containment measures, which are assumed to impact transportation and industrial fuel demand well into 2021,” Barkindo opined.

Heading into Thanksgiving with health care officials asking holiday travelers to remain home during one of the busiest travel periods of the year, crude oil prices have continued to decline in the U.S. and globally, although it is not yet reflected in pump prices for consumers. Barkindo surmised that global crude oil prices are now caught in a contango, meaning futures contracts are higher than the current price.

“Crude futures in all major benchmarks remain in contango, and in terms of inventories, it is clear that destocking has continued over the past month following the third quarter trend.  In the third quarter of this year, global inventories declined across all components by around 250 million barrels,” warned Barkindo. “The overhang remains massive …, and the situation requires vigilance and continuous monitoring, particularly given the large uncertainties going forward.”

What all this means for Big Oil is that crude oil prices below $50 a barrel are unsustainable for the oil sector to remain profitable, unless oil firm’s hedge in future crude production at a lower price. However, Dallas-based ExxonMobil recently announced an estimated third quarter 2020 loss of $680 million as the nation’s largest oil giant continues to cut costs, slash jobs and slow oil production worldwide.

But the biggest blow to Exxon came in August when it was dropped from the Dow Jones Industrial Average after more than nearly a century on the nation’s blue-chip stock index. As the Dow Jones’ oldest member, ExxonMobil joined the index in 1928 as part of the Standard Oil of New Jersey monopoly. Created by the merger of the nation’s two largest oil companies in 1999, Exxon Mobil was replaced on the Dow by SalesForce.com, a tech firm that sells customer relationship management (CRM) software that allows companies of all sizes to managed their varied customer and employee interactions.

But ExxonMobil is not the only global oil conglomerates to experience the fallout of oil prices near $40 a barrel. Only a month ago, ExxonMobil rival Royal Dutch Shell announced plans to ease global warming after being a climate change denier for the past three decades. In explaining the company’s downsizing and restructuring of its 90,000-person global workforce, the Dutch oil giant known in the U.S. as Shell Oil said the COVID-19 pandemic had accelerated the company’s “enhanced ambition” to be a net-zero emissions energy business by 2050 or sooner. 

“In that context, a company like Shell has a choice. It can choose to produce oil and gas with the lowest possible emissions. Or it can say: “If society wants to get to net-zero emissions and we really want to be an integral part of that society, then we need to get to net zero as well, ” said Shell Oil CEO Ben van Beurden in September. “We, Shell, have decided to go on the second, bigger, mission. It is consistent with our strategy and it fits better with us, as the company and people we are, and with the vision we have for where we want to be.”

But the scariest times for Big Oil may be in 2021 as the industry is expected to run into a major cash crunch. In the recent third quarter, Saudi Aramco, just nine months after the world’s biggest IPO in December, reported a 45% collapse in third-quarter quarter profits from a year ago.

That cash loss led the royal government of Saudi Arabia, which last year paid its citizens over $13 billion to offset their cost of living expenses, to announce on Nov. 16 that it will issue international bonds to raise cash to pay Saudi Aramco’s new shareholders billions of dollars owed in dividends.

What all this means is the trickle-down effect mentioned by Barkindo may be devastating for the rest of the industry. Murphy Oil Corp., the longtime Arkansas oil driller and producer that earlier this year moved its corporate headquarters to Houston, earlier this month reported a third quarter loss of $244 million.

And like the Great Recession’s impact on the financial sector that pushed more than 500 banks onto the FDIC’s notorious failed bank list since 2008, the most recent downturn has had the same effect on the oil sector. According to the most recent Haynes and Boone’s Oil Patch Bankruptcy Monitor, 248 producers have filed for bankruptcy since Dallas-based law firm began tabulating E&P filings. Through the third quarter, these oilfield bankruptcies involve more than $175 billion in aggregate debt with over $50 billion so far in 2020. 

And for the oil industry, the New Year may be worse year than even the now hated Year 2020.