The oil supply demand equation may be very different than what the IAE is suggesting. Cornerstone Analytics has a very contrarian view on oil demand destruction being only half what the government agency suggests. As supply has adjusted fast to the low scenario, we may see an imbalance soon. Shale rig count continued to collapse below the 200 mark. The rig count of today is the production level in six/eight months time. Brace for a good 40% decline. Furthermore, Deloitte reports that Shale companies will have to boost their Q2 impairment charges to 300 Billion $ pushing their debt to equity ratio up 10 points and they think at 35$ WTI, 35% of them should file for Chapter 11. These 300 billion $ impairments are more or less the negative free cash flow that the Shale industry has cumulated since 2014. In this context, the Wall of debt ($250 Billion) they are facing in the next three years looks like the last nail in the coffin of an industry that not only loses money but has a revolting Carbon imprint. A victory of Biden would probably put a brake on the development of new wells on Federal lands but the laws of economy may have settled the case far before. As far as Conventional oil is concerned, the situation in Libya is not clear cut. Egypt stated this weekend that any Turkish attack on SIRTE would be a red line triggering “Boots on the Field”. Haftar supported by Russia, the UAE, Egypt, and France is imposing a No-Fly Zone over SIRTE. Libya has already lost 6 Billion $ of revenues over the last five months because of Haftar blockade of oil installations. No threat short term from Libya oil coming back to the market. With Iraq promising to comply with OPEC + cuts, the Oil Demand/Supply could be balanced as soon as July. Is it what the futures market tells us?
Short term Brent is in backwardation with the spot at 42.26$ and October at 42.15$. Not a big deal for arbitrage but a clear sign that Contango is dead and that destocking begins. The curve is very flattish with June 2021 at 43.41 $ a barrel. We believe the V or U shaped recovery of demand and L or Hockey shape recovery of supply will lead to prices over $ 60 one year from now.
In this context, Aframax, Suez Max and LR rates have fallen below operating break even. Only VLCC day rates are staying above but for how long? The bright spots in shipping came from containers with Maersk giving a better picture than the one feared and mostly in dry bulk, with China restocking iron ore. The Baltic Exchange capsize index has been up 130% in the last five days. Newcastle max rates are also improving. As recovery plans are decided by the different countries, Europe is putting a big emphasis on Green investments to boost the economy. Hydrogen is a key theme for future energy investments whereas the Offshore Wind farms are attracting the business of oil supply companies such as SUBSEA 7 and AKER SOLUTIONS. The porosity between the two businesses is huge as the same vessels can be used.
