Energy prices got hit on a wave of risk-off events and stories that could impact supply and demand in the short and long term. Tropical storm Berta hurt oil prices and the front-month natural gas as it succeeded in shutting the Houston Shipping channel locking in oil and gas exports.
Yet it was the talk of the return of Libyan oil that seemed to raise fears of a global oil glut as demand expectations wavered in the backdrop of new coronavirus restrictions in both the U.K. and France.
A truce between eastern warlords Khalifa Haftar, and Ahmed Maiteeq, the Vice-President of the Libyan Presidential Council, the United Nations-recognized government of Prime Minister Fayez al-Sarraj will restart oil output after an almost 8-month shut-in. The projections are, if all goes well in Libya, that next year they could be producing over 1 million barrels of oil a day, and that might be a problem for OPEC and something they may have to adjust their production to offset that increase.
Unlike the rest of the cartel, Libya, because of its concerns, had no OPEC quota, and they could create a situation where they could help add to a glut of supply, especially if covid shutdowns starts to weaken demand.
Yet OPEC is not ready to act in response. OPEC is skeptical of the peace deal and, with good reason, is going to take a wait and see attitude before adjusting the output. OPEC is taking risks if the Libyan deal holds but basing its inaction on past performance. While no guarantee of future results, it still looks pretty dicey.
Yet in the long term, we have to be disturbed about the lack of investment and impact on drilling now at the lowest level in 80 years. That is the story, according to World Oil Magazine. In their 2020 mid-year forecast update for drilling and production, if their drilling forecast is correct, it would be the lowest since before 1940. Indeed, according to World Oil, it could go back considerably further than the 1930s.
World Oil says that operators may drill at a pace slower than those of 1933 and 1931, when “well totals of 12,170 and 11,716, respectively, were tallied. The fact that we are looking at a level potentially below these two years—below 11,000 wells—is quite historical, albeit remarkably negative.
Considering that just last year, we estimate that somewhat over 22,000 wells were drilled, and in 2018, the number is estimated at approximately 25,000. Six years ago, in 2014, that the U.S. well total was 45,535. There has not been an annual total above 30,000 since then. So unless we see peak demand forever, which we won’t, then we are headed for a tight market down the road.
Hurricane Sally, Tropical Storm Beta and a storm to be named later is still causing havoc to all energy operations in the Gulf of Mexico. Tropical Storm Beta shut the Houston Shipping Channel and killed demand and exports and imports for natural gas and oil. Now we have a new storm possibility.
The National Hurricane Center is reporting, “Showers and thunderstorms extending from the Bahamas westward through the Straits of Florida and into the southeastern Gulf of Mexico are associated with a frontal system. This system is forecast to move slowly southward over Cuba during the next couple of days, and then move back northward on Thursday through Saturday.
Environmental conditions could be marginally conducive for some slight development over the southeastern Gulf of Mexico late this week. Regardless of development, locally heavy rainfall is possible over portions of Cuba on Tuesday and Wednesday. Formation chance through 48 hours…low…near 0 percent. Formation chance through 5 days…low…10 percent. Stay tuned.