A weekly look at what occurred in the oil markets of the U.S. and the world this past week and what’s ahead.
The Dallas Federal Reserve Board’s quarterly survey of conditions out in the oil patch is positive for the trucking sector only in one sense – production looks like it is going to continue to rise.
But the trucking and transport sector has two relationships with the U.S.upstream oil sector. It consumes its product, but it also provides a significant amount of service to the industry’s activities. The first part of that, according to the widely watched Dallas Fed survey, is positive for the industry – there will be plenty of production and prices are expected to stay low.
The second part of that isn’t as good. The sentiment on upstream activity – the kind that actually hires trucks – was decidedly negative in the survey.
The Dallas Fed index is based on a scale where zero in a category means conditions are status quo, negative numbers mean things are getting worse and positive numbers signal an improving outlook. Its broadest benchmark, the business activity index, fell to a negative 7.4 in the third quarter. It was negative 0.6 in the second quarter. (The third quarter is not complete but the survey was taken in early September.)
The outlook was particularly negative for oilfield service firms. The producing companies can look at the current stability or increase in output as at least one positive to take away from the current market. But oilfield service companies are dealing with low prices for their services and a declining rig count. (This week’s Enverus rig count stood at 945, down from 954 a week ago. A year ago, it was 1,158.)
The oilfield services index was positive in the second quarter; it’s now down to negative 24, a drop of 27. The figure for ”input costs” was down to 5.6 from 27.1 last quarter. And the prices received for services was down to negative 18.5 from negative 12.1, “suggesting a further decline in oilfield services prices.” Operating margins were already negative in the second quarter at negative 24. In the third quarter, they were negative 32.8.
One notable number concerned employment. When talking about the driver squeeze, one of the arguments for the difficulty in seating drivers in trucks was competition coming out of the oil patch. But the aggregate employment index in the report was negative 8, down from negative 2.5. And the aggregate hours worked dropped to negative 2.4 from positive 3.1. Not surprisingly, the index for aggregate wages and benefits dropped to 6.2 from 14.5.
And yet, the industry is complaining it is having trouble attracting workers. In another part of the survey, respondents were asked what was the “main constraint…limiting near-term growth?” While the current price of oil and natural gas got 42 percent of the vote, “problems finding workers” came in second with just 3 percent.
But the executives were asked what was the second most important constraint. “Problems finding workers” came in second, with 13 percent overall. (The low price came in second with 27 percent, for a total first and second place vote percentage of 59 percent.)
“Limited access to capital and credit” and “investor pressure to generate free cash flow” both got a healthy number of votes. We wrote about the debt issues and those financial side consequences several weeks ago.
The bottom in all this activity is not close, according to the survey. In response to the question about when the rig count will bottom, 2 percent said it already has, 28 percent said in the fourth quarter, but 23 percent said the first quarter of 2020, 20 percent said the second quarter of 2020 and 26 percent said they believe it will be after the midpoint of next year.
In a compilation of various comments that were submitted with the survey, one respondent summed up the pessimism – “Crude oil prices will need to drop to $40 per barrel to find a bottom in the rig count.”
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When (if?) IMO 2020 starts impacting diesel markets, where will it hit first? One guess – the market for marine gasoil (MGO). Marine gasoil is a diesel product that is established and known to the marine industry. There are therefore no concerns that shipowners have in using MGO, unlike the new IMO 2020-compliant fuels known as very low sulfur fuel oil (VLSFO). Some shipowners have suggested they are a little reluctant to plunge right into VLSFO use.
In a broader market that was mostly flat this past week, the price of Houston 0.1 percent MGO compliant with IMO 2020 was assessed at the start of the week by S&P Global Platts at approximately $690/metric ton. By the end of the week, it was near $655.
Keep watching for the market to react. But it isn’t happening yet.
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Activists may demand an end to fossil fuels. But in the annual International Energy Outlook put out this past week by the U.S. Energy Information Administration, there is no sign of it.
The entire report puts all energy sources on the same volume basis – British thermal units, or Btus. When discussing world consumption, that’s a lot of Btus. For example, the report says that global liquid fuels demand – petroleum – will reach 240 quadrillion Btus by 2050. But the more important number is that figure will be up 20 percent between last year and the target year that’s almost 30 years away.
The EIA, echoing other agencies, said it sees the vast majority of that growth coming from non-OECD nations, in other words, from the developing world. About three-quarters of the growth will come from the non-OECD Asian nations, according to the report.
And in the OECD, which includes western economies, demand will decline slowly, the report said. There will be increases in consumption but they will be more than offset by gains in efficiencies. The Americas and OECD Asian nations will see flat consumption while European demand will decline.
As far as U.S. production – important to the trucking sector for the reasons spelled out above – the report estimates that U.S. crude output will be about 14 million barrels per day (b/d) between 2025 and 2040, “driven by hydraulic fracturing of tight resources in the U.S. Southwest.” Even by 2050, a decline will take it to 12.2 million b/d. That’s still right about where it is today.