Whereas 4 billion people are exiting their Covid home prison and start hitting the road again , the gasoline demand is recovering fast . China is at 82% of the pre covid level and Chinese refineries are now running at 76% from the low 60’s in March. Sinopec given the demand has decided to cut 50% of its product exports.In the USA, we have seen until this week, a draw on gasoline inventories . Oil for road transport is normally close to 40 million barrels out of 100 million of daily demand. At some stage during the lock down, it probably fell below 20 million representing the bulk of the demand destruction. If Jet fuel (8% of demand) is not going to recover any time soon, the oil used for petrochemicals saw a very stable demand for the first 4 months of the year as demand for single use plastics and fertilisers jumped . So, we believe that with road traffic recovering, we shall see a somewhat V shape recovery of oil demand, probably to 95 million barrels per day next June 2021 . Supply is a very different story and it is key for OPEC to maintain pressure on WTI below $35 until November to destroy as much US and Canadian capacity as possible. Shale and Canadian oil sands are moving from being the “usual Suspects” for the global oil disruption of the period 2014-2020 to the main casualties. Exit the new Kids on the block.
Drilling rigs are at the 2009 low and below the 300 units necessary to drill the 6000 wells necessary to maintain production stable . Whereas a typical well produces 80% of its capacity during the first six months , a probable level of new wells below 4000 units should take a big toll on the US production. With $ 280 billion of debt maturing by 2023 and a Cash break even of $55 , it will be very hard for the 6000 wildcatters to survive the shock. Not even Trump and its armada of Tweeters can do something. We believe that the DOE figures are understating the disaster and that already 1.6 million barrels have been cut in the Permian and 500,000 in the Bakken, not to speak of the others… The shale production should fall from 8 million barrels a day last year to 4/4.5 million by December 2020 . North America will have moved from being the price setter to being again under the dominance of OPEC + . Covid did in three months what Saudi Arabia could not achieve in the last six years.
This means that with a L shape supply recovery to 86-88 million barrels a day and a 95 million barrels of demand, we could enter an oil Supercycle with prices in the $60-80 as early as June 2021 . In this scenario, high yield non shale energy bonds should stage a big recovery. With the crack spread slowly recovering, refineries should start to look good as well.
Covid 19 pandemic and MBS irrational pumping policy gave birth to a once in a lifetime scenario for oil and products tankers until three weeks ago . Tanker rates skyrocketed to $ 200,000-$300,000 a day , a level unseen since November 2019. Yet, tanker stocks outperformed but failed to reach 60% of their 2019 levels. The unwinding of the contango has been much faster than expected with rates now as low as $40,000 a day. The floating storage story is history and furthermore, with the slow draw on inventories and the cut in supply of oil, it does not fare well for the tanker trade. We expect both tanker values and day rates to continue falling.
Only a massive destruction of shale turning the US again into a large importer of Brent or a harsh Covid second wave restarting a massive economy lock down could revive the trade. Unlikely in our opinion.
