Coronavirus Has Crushed Oil Prices - Art Berman · 3/20/2020 · Labyrinth Consulting Services,...

Labyrinth Consulting Services, Inc. artberman.com

Coronavirus Has Crushed Oil Prices

PIFNHouston, TexasMarch 20, 2020


Summary ObservationsØ Economic depression is unavoidable.Ø Coronavirus is leading cause of economic downturn but Saudi price cuts

and export increase may be a tipping point or Lehman moment for markets.

Ø This is not a price war nor is it a war on shale but an axiomatic response.Ø Oil prices have been low since 2014 because of a familiar cycle of over-

investment, over-supply and devaluation.Ø People are reluctant to accept new paradigms. Recent price rallies driven

by sentiment and geopolitics but not supported by fundamentals.Ø Poor energy sector performance has resulted in reduced capital & credit.

Ø Comparative inventory showed that markets did not value WTI at more than $60-$65 since at least mid-2017.

Ø Coronavirus now adds to the long list of oil market problems.Ø Markets were slow to recognize the scale of the virus’s effect on markets.


What we know about Coronavirus (Covid-19)Ø The threat is to healthcare capacity more than to human life.Ø It seems likely that economic activity will be limited for several months.

Ø That may be extended through 2020 or longer.Ø A vaccine will not be available for 18 months.Ø Solutions will be found to re-open the global economy.


• Any movement, activity or event in nature requires energy• Human society runs on energy

Ø Work requires energy—joules/calories.Ø Subsistence: energy intake = energy expenditure.Ø Surplus: energy intake > energy expenditure.Ø If I accumulate excess energy such as grain, I may choose to have you do some

of my work in exchange for some of that energy.• Money is a call on work

Ø Today, most work is done by oil, natural gas and coal.Ø 1 barrel of oil contains about 4.5 years of human manual labor.

“Energy is and always will be the currency of life” –Nate Hagens


13.1%

30.6%

36.5%

8.3%

2.7% 0.9%

2.5% 5.1%

Windwas2.5%ofU.S.PrimaryEnergyConsumption &Solarwas0.9%v

COAL NATURALGAS PETROLEUM NUCLEAR HYDRO GEOTHERMAL SOLAR WIND BIOMASS

Petroleum

NaturalGas

Coal

EnergyistheEconomyFornow, thatmeansoil,naturalgasandcoal

Source:EIA&LabyrinthConsulting Services,Inc.Table_1.3_Primary_Energy_Consumption_by_Source


$72.38

$50.65

$57.52

$0$10$20$30$40$50$60$70$80$90$100$110$120$130$140$150$160$170$180$190$200$210

Jan-79

Jan-80

Jan-81

Jan-82

Jan-83

Jan-84

Jan-85

Jan-86

Jan-87

Jan-88

Jan-89

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

CPIAdjustedW

TIPrices(December2019DollarsPerBarrel)

2006-2014

Expensive

UnconventionalOil

Avg$98

2015-2020

Over-supply

&price

deflation

Avg$55

Areturntoparadigmofoilover-supplyandpricedeflationafter2014

Similarto1986-2002followingperiodofexpensiveoil1979-1985

Source:EIA, U.S.Bureau ofLaborStatistics &LabyrinthConsulting Services,Inc. Oil&GasGeneral CPI-AdjustedWTI-USGDP-Bubbles

1986-2002

Over-supply&

pricedeflation

Avg$37

2003-2005

Endof

CheapOil

Avg$58

AllpricesinJanuary2020dollars

1979-1985

Expensive

Unconventional

Avg$74


10.3

3.8

$114.27

$65.48

$0

$50

$100

$150

$200

-1

1

3

5

7

9

11

13

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

BrentPrice

(2020$/barre

l)

SaudiArabiaOilProduction(m

mb/d)

SAPROD CPIBRENTSource:EIA,BP & Labyrinth Consulting Services,Inc. EIA/EIAInternational/International_data_ANNUAL MASTER

Saudi oilproductionfell6.5mmb/dfrom1981to1985butBrentpricefellfrom$114to$65in2020dollars

SaudiOilProduction(LHS)

BrentPrice (RHS)


$30.32

$70.98

$49.52$51.37

193

568

618

509

521

-100

-50

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

750

800

850

900

950

1000

1050

1100

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

$55

$60

$65

$70

$75

$80

$85

$90

$95

$100

$105

$110

$115

$120

$125

$130

Jan-14

Mar-14

May-14

Jul-1

4

Sep-14

Nov-14

Jan-15

Mar-15

May-15

Jul-1

5

Sep-15

Nov-15

Jan-16

Mar-16

May-16

Jul-1

6

Sep-16

Nov-16

Jan-17

Mar-17

May-17

Jul-1

7

Sep-17

Nov-17

Jan-18

Mar-18

May-18

Jul-1

8

Sep-18

Nov-18

Jan-19

Mar-19

May-19

Jul-1

9

Sep-19

Nov-19

Jan-20

Mar-20

4-MonthLaggedTightO

ilRigCount

WTIPrice($/barrel)ChartTitle

WTI RC

Tightoilrigcounttripledwithoilpricelessthan$65thenflattened&fell

MarketsperceivedWTImarginalbarrelat$60-$65

butre-valuedpricelowerafterlate2018oil-pricecollapse

Source: BakerHughes,EIADPR,Drilling Info&LabyrinthConsulting Services,Inc. RigCount/Rig Count2019/MONTHLYSHALEGAS-TIGHTOILRIGCOUNT

Nov

2018

Feb

2020

Jan

2020

Jul

4-monthLagged

TightOilRigCount

(RHS)

WTI

(LHS)Jan

2016

Dec

2018

Dec

2018

RigCountTripled

below $65WTI

$65


$63.05

$58.54

$31.73

$20.37

$15

$25

$35

$45

$55

$65

Jun-19

Aug-19

Oct-19

Dec-19

Feb-20

Apr-20

Jun-20

Aug-20

Oct-20

Dec-20

Feb-21

Apr-21

Jun-21

Aug-21

Oct-21

Dec-21

Feb-22

Apr-22

Jun-22

Aug-22

Oct-22

Dec-22

Feb-23

Apr-23

Jun-23

Aug-23

Oct-23

Dec-23

Feb-24

Apr-24

Jun-24

Aug-24

Oct-24

Dec-24

WTIFuturesPrice($/barrel)

JAN32020

JAN102020

JAN172020

JAN242020

JAN312020

FEB52020

FEB142020

FEB212020

FEB282020

MAR62020

MAR132020

MAR182020

Source:CME& LabyrinthConsultingServices,Inc.

WTIpricelowestsinceMar3,1999in2020dollars&12-mospreadsare-$9.80ForwardcurveinJune-Septembersuper-contango(-$1.10- $1.29)

Prompt-month-$0.49contangolessextremethanBrent-$1.81onMarch18

Oil&

GasGeneral/Futures&FutureSpreads/FU

TURESCO

NTRA

CTSMAS

TER

Jan10

Jan3

Jan17

Jan31

Jan24

Feb 7Feb 14Feb 21

Feb 28Mar6

Mar13

Mar18


$68.60

$33.85

$24.88

$20

$30

$40

$50

$60

$70

$80Jun-19

Aug-19

Oct-19

Dec-19

Feb-20

Apr-20

Jun-20

Aug-20

Oct-20

Dec-20

Feb-21

Apr-21

Jun-21

Aug-21

Oct-21

Dec-21

Feb-22

Apr-22

Jun-22

Aug-22

Oct-22

Dec-22

Feb-23

Apr-23

Jun-23

Aug-23

Oct-23

Dec-23

Feb-24

Apr-24

Jun-24

Aug-24

Oct-24

Dec-24

BrentPrice

($/barrel)

JAN32020

JAN102020

JAN172020

JAN242020

JAN312020

FEB72020

FEB142020

FEB212020

FEB282020

MAR62020

MAR132020

MAR182020

Source:CME& LabyrinthConsultingServices,Inc.

Brentforwardcurvein"super-contango"March18May-Junespreadis-$1.81,June-Julyis-$1.62&July-Augustis-$1.39

12-monthspreadof-$10.83isgreatestsinceFebruary20156-monthspreadis-$6.96

Oil&GasGeneral/Futures&Futures Spreads/FUTURESCONTRACTSMASTER

Jan3Jan10Jan17

Jan31

Jan24

Feb7

Feb14Feb21

Mar18

Feb28

Mar6

Mar13


$22.16

$53.46

$115.24

$22.48

$117.61

$107.1735

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$0

$5

$10

$15

$20

$25

$30

$35

$401960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

WTIPrice2018DollarsPerBarrel

U.S.G

ovennment+Non-FinancialCorporateDebt(Trillions)

WTI GDP DEBT WTIAVG1950-2017

Debt

GDP

Source:U.S.FederalReserveBank,U.S.Bureauof Labor Statiistics, WorldBank,EIA&LabyrinthConsulting Services,Inc. Oil&GasGeneral/U.S.Public Debt

WTI Price2020Dollars

(RHS)Oil Shocks1974-1985

$73

Debt >GDPAfter1986

Debt InflectionPoint1982

U.S.Debtbeganincreasingduringoilshocks&exceededGDPBy1986U.S.andtheworldhavebeenborrowingforwardontheirsurplusenergy

Itfeelslikegoodtimesbutit'snot

TheOldOrder$25

$54NewNormal1986-2004

$37

Highest Prices2005-2014

$95

Averagepricesince 2014is44%higher than1986-2004avg

Coronavirus Has Crushed Oil Prices - Art Berman · 3/20/2020 · Labyrinth Consulting Services,...

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Transcript of Coronavirus Has Crushed Oil Prices - Art Berman · 3/20/2020 · Labyrinth Consulting Services,...