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Q4 recovery best case scenario in Enverus’
updated oil & and gas market outlook
Austin, TX (May 6, 2020) – Enverus, the leading oil & gas SaaS and data analytics company, has released its latest FundamentalEdge report that presents the company’s updated view of the oil and natural gas markets, with a special focus on the remainder of 2020 and forecasts for the next five years.
“There have been numerous ideas proposed to try and correct the unprecedented drop in oil and gas prices created by a global supply imbalance, Saudi-Russian price spat, coronavirus pandemic, and resulting demand destruction,” said Bernadette Johnson, vice president of Strategic Analytics at Enverus. “The recent OPEC+ agreement to cut 9.7 MMBbl/d in May and June for the near term is too little, too late, however. The answer to understanding the path to recovery has been there all along—fundamental economics and supply/demand,” said Johnson.
“It’s also important to note that any oversight-led cuts may cause a broad range of unintended consequences because the oil market is very complex. Different basins and fields produce very different qualities of crude. The previously used yard sticks do not account for the growth of unconventional supply and each refined product has its own market that is impacted differently right now,” added Johnson.
“In this environment, it is hard for shale producers to get any more efficient than they already are, and so the market and common responses to a price crisis are all well underway. Shale producers are nimble—they can add rigs quickly and bring a well online in three months or less when the time is right. Yes, there will still be more painful announcements, but we are seeing the bottom. The world is still highly reliant on hydrocarbons and that isn’t about to change in a six-week period,” said Johnson.
Key Takeaways:
- Despite unprecedented OPEC+ production cuts and anticipated production declines elsewhere, the supply/demand imbalance in Q2 2020 is still woefully close to 15 MMBbl/d. Inventories of crude oil and refined products are rising worldwide. There is no way to avoid a severe drop in US crude and condensate production in 2020, not with today’s price environment and certainly not with the outlook for global supply/demand balances. Apart from weak demand and low prices, a significant portion of US crude production in April-May 2020 is at risk of being shut in due to the lack of suitable market disposition.
- The weak crude oil price environment has pushed the rig count to levels not seen since 2016. In April alone, the rig count is down 37%, or 258 rigs (April 1-26). Based on pipeline data, oil-directed basins—including the Permian, Eagle Ford, Anadarko, and Bakken—have started to show signs of gas production losses. Enverus continues to expect a significant decline in gas production in 2020. However, the current forward-curve prices are not enough to support the upcoming peak winter demand. Therefore, Enverus forecasts prices will exceed $4/MMBtu and could reach $4.50/MMBtu as early as the coming winter. Longer term, natural gas prices are expected to average $2.80/MMBtu; this level allows gas production growth to meet expected demand gains.
Capex cuts since the end of Q1 earnings season have amounted to $21B for US public independents, a 32% average reduction from previously disclosed guidance. The same operators will expect to spend $50B less in capital dollars in 2020 than 2018. Lower capex and remaining hedges are some of the few levers that help mitigate the accelerated deterioration of liquidity.
