API Industry Outlook 3rd Quarter 2020 - R. Dean Foreman, Ph.D.
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API Industry Outlook 3rd Quarter 2020 R. Dean Foreman, Ph.D. Chief Economist September 17, 2020
Key points 5-year range Quarterly increase
Quarterly decrease
U.S. petroleum
demand
Economy - 2020 is broadly expected to be a ‘one-and-done’ recession 16.1 mb/d Revenues
$363 B
o Following the 2020 COVID-19 global recession, 3rd party consensus expectations
for a rebound to 4.4% y/y growth in 2021
o Emerging markets have driven the majority of economic and energy demand
growth
U.S. refinery Net
Oil markets – Q3 global demand has exceeded supply throughput income
o Global oil demand has exceeded supply in Q3 2020 per EIA, and EIA expects prices 13.6 mb/d U.S. drilling $(81) B
activity
to rise to about $50 per barrel over the next year 392 rigs
o U.S. shale oil productivity has risen and estimated breakeven prices have fallen
Natural gas – U.S. natural gas held up relatively well despite a lull in global LNG
U.S. oil & total gas Capital
o With record-low prices in Q2 2020, some global liquefied natural gas projects and production expenditures
expansions were placed on hold due to the 2020 COVID-19 global recession 30.3 mb/doe Q2 2020 averages $44 B
Brent $29.34/bbl
o U.S. natural gas supply/demand fundamentals remained solid, with prospective WTI $27.78/bbl
market opportunity hinging largely on the electricity generation sector per EIA NGL composite $3.75/mmBtu
Henry Hub $1.71/mmBtu
• Financial compilation based on API 200 companies with shares listed on
U.S. stock exchanges.
sources: EIA; API Monthly Statistical Report; Bloomberg and company
reports; Baker Hughes; API Team analysis
What we’re watching now
Global progression through COVID-19 and traction with economic stimulus programs
Emerging market economic health, resilience, foreign exchange rates, and fiscal flexibility
Small and medium-sized enterprise performance amid the 2020 COVID-19 recession
The U.S. has remained the largest recipient of global Foreign Direct Investment (FDI) inflows that UNCTAD expects could be
pressured due to trade frictions and COVID-19-related supply chain disruptions
Reuters
A Financial Crisis Is Looming for Smaller
Suppliers
COVID-19 Response in Emerging Market
Economies: Conventional Policies and ….a less visible crisis deep within supply
Sovereign Borrowing Outlook for OECD Beyond chains is destabilizing small and medium-
Countries – Special COVID-19 Edition sized enterprises (SMEs) and could add to
The total market borrowing is expected to reach an the woes of the global economy.
unprecedented level of $28.8 trillion in bonds and bills in
2020….the central government marketable debt-to-GDP ratio for Federico Caniato , Antonella Moretto and James B. Rice, Jr.
Aug. 6, 2020
the OECD area is projected to increase by 13.4 percentage points.
Martin Mühleisen, Tryggvi Gudmundsson, and Hélène Poirson Ward
In the medium and long-term, preparedness for higher refinancing
risk is critical for sovereign issuers with heavy debt repayment Aug. 6, 2020
requirements
OECD, July 20, 2020
Global economy &
oil markets
www.api.org
Emerging economies have generally contributed the most to global economic
growth since the early 2000s
Global GDP growth has historically been volatile and cyclical, averaging 3.0% per year between 1970 and 2019
Since 2003, emerging economies (Non-OECD) have generally contributed more to global growth than OECD economies
Global GDP growth and contributions by region, 1970-2019*
y/y%
6
Average
5 1970-2019
4
3
2
1
0
-1 Organisation for Economic Cooperation and Development (OECD)
-2 Non-OECD
-3
1970 1980 1990 2000 2010 2020
sources: IMF; Bloomberg * Market exchange rate basis
World Bank and Bloomberg consensus expect a “one-and-done” recession
The Bloomberg consensus expects economic recovery to take hold beginning in Q3 2020
The COVID-19 global recession has been the most synchronized on record – and with the sharpest deterioration across
multiple measures since 1960
Consistent with the Bloomberg consensus, World Bank expect global economic growth to resume in 2021, and oil
consumption has historically grown in tandem with the economy
Global real GDP outlook Global activity comparisons during economic recessions, 1960 -2020
Global real GDP Oil consumption
y/y% 3rd-party consensus Index, year t-1 = 100 Index, year t-1 = 100
6 range, July 2020 120 120 1975, 1982, 1991
1975, 1982, 1991
4 Average 1970-2019 2009
2009
110 110 2020
2 2020
0 100 100
-2
90 90
-4
-6 80 80
2019 2020 2021 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4 t-4 t-3 t-2 t-1 t t+1 t+2 t+3 t+4
sources: IMF; Bloomberg * Market exchange rate basis sources: World Bank; Kose, Sugawara, and Terrones (2019, 2020) sources: World Bank; IEA; EIA; Kose, Sugawara, and Terrones (2019, 2020)As the global economy goes, historically so has oil demand…
Global oil demand has historically changed in tandem with the economy
Global oil demand and GDP
Million barrels per day
2021
100 EIA estimates
2020
85 Double-dip recession,
front-wheel drive and
CAFE standards
Great Financial
70 (1980-1982)
Crisis (2008-2009)
55
1970
40
0 20 40 60 80 100
*Market exchange rate basis Real GDP (Trillion 2010$)
sources: EIA; Bloomberg; IMF; API Team calculationsGlobal oil demand has outstripped supply in Q3 2020 per EIA
In Q3 2020, oil demand among OECD economies fell by 4.7 million barrels per day, compared with 2.4 mb/d among Non-OECD economies per EIA
By contrast, Q3 2020 global supply was down by 9.7 million barrels per day compared with one year ago with cuts led by OPEC nations
Global oil demand Global oil supply
EIA EIA
Million barrels per day estimates Million barrels per day estimates
100 100
75 Non-OECD 75 OPEC
(Emerging
economies)
50 50 United States
25 OECD 25 Other Non-OPEC
(Developed economies)
0 0
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
source: EIA STEO (September 2020)EIA expects the global oil market to rebalance in Q3 2020 and support oil prices
of about $50 per barrel in 2021
EIA global supply/demand and Brent price estimates as of September 2020
Million barrels per day (mb/d) 2020$/Bbl
8 125
Supply less demand Brent crude oil prices . EIA estimates
6
100
4
2
75
0
50
-2
-4
25
-6
-8 0
2015 2016 2017 2018 2019 2020 2021
sources: EIA STEO (September 2020); BloombergU.S. oil well productivity gains have lowered estimated breakeven prices
EIA reported increased new well productivity as companies drilled tended to drill only their most prospective targets
BTU Analytics estimated breakeven prices were near or below recent market prices among the major U.S. oil producing basins
U.S. oil well productivity – new production per rig Oil estimated breakeven prices – July 2020*
Barrels per day oil-equivalent Dollars per barrel ($/Bbl.)
5,000 0 20 40 60
July 2020
4,000 Eagle Ford - West July 2019
3,000 Bakken
Eagle Ford WTI spot price
2,000 Eagle Ford - East Sept. 8, 2020
Bakken
1,000 Permian - Delaware
Permian
0 Permian - Midland
2016 2017 2018 2019 2020
source: EIA Drilling Productivity Report *Half cycle breakevens assuming 10% discount factor. source: BTU AnalyticsThe U.S. reverted to being a petroleum net importer due to the 2020 COVID-19
recession, but global petroleum demand recovery could support U.S. exports
As U.S. crude oil and natural gas liquids (NGL) production rose, petroleum net imports fell – and vice versa so far through COVID-19
Crude oil contributed the most historical growth of U.S. petroleum exports but have remained relatively steadier than refined
product exports through the COVID-19 pandemic, which suggests global economic and oil demand recovery could be the key
U.S. liquids production and petroleum net imports U.S. petroleum exports & share of global consumption
Million barrels per day Million barrels per day; %
20 12
U.S. crude oil and NGL production COVID-19 Refined product exports
U.S. petroleum net imports 10 Crude oil exports
15 U.S. exports' share of global consumption
8
10 6
4
5
Net imports 2
0 0
Jan-16 Jan-17 Jan-18 Jan-19 Jan-20 Jan-16 Jan-17 Jan-18 Jan-19 Jan-20
-5
sources: EIA; API Monthly Statistical ReportU.S. liquids fuel consumption could return to strong 2019 levels by the second
half of 2021 per EIA
EIA projects positive year-on-year growth for every major refined product by April 2021, with the strongest recoveries in gasoline
and jet fuel while distillates/diesel fuel being the weakest
U.S. liquid fuel consumption by fuel
Million barrels per day
25
EIA estimates
Fuel ethanol blended into gasoline
20 Residual fuel oil
Naphtha/gasoil (other oils)
15
Jet fuel
Distillates/diesel fuel
10
5 Motor gasoline
0
Jan-18 Jul-18 Jan-19 Jul-19 Jan-20 Jul-20 Jan-21 Jul-21
source: EIA STEOMotor gasoline and diesel fuel prices have generally moved with crude oil
Crude oil, retail gasoline and diesel fuel prices, adjusted for consumer price inflation
Dollars per gallon (2020$)
4
EIA estimates
3
2
1
0
2015 2016 2017 2018 2019 2020 2021
West Texas Intermediate crude oil Gasoline - U.S. average Diesel - U.S. average
sources: EIA; AAA; Bloomberg; BLSDecreased energy prices and spending have enabled households to
cope with increased food, education and healthcare spending needs
U.S. household expenditures
Index (2008=100)
200
% change (2008-2019)
175 Healthcare +74.5
150
Education +38.0
125
Food +26.8
100
Household energy* -14.5
75
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
source: Bureau of Labor Statistics’ Consumer Expenditure Survey (2020)
* Includes motor fuels, natural gas, fuel oil and electricityNatural gas www.api.org
Global natural gas prices in July 2020 (dollars per million Btu) showed signs of
regional recovery in August
UK
$1.79
Belgium
$2.32
Canada Korea
$1.79 Spain Japan
$1.88 $2.37
$4.10
Henry Hub China
$1.77 $2.37
Mexico
$1.95 India
$2.29
Argentina
$2.17 Updated spot prices as of August 28, 2020 (dollars per million Btu)
Henry Hub UK Spain S. Korea Japan
www.api.org
sources: U.S. FERC; METI; Bloomberg 2.48 1.80 4.30 6.70 6.70Global natural gas markets have appeared to be adequately supplied
Despite low prices, global natural gas demand has been down so far in 2020 due to COVID-19 prevention measures
With the startup of new liquefaction capacity, global LNG markets could be over-supplied
Global natural gas demand and supply by source Global LNG demand and supply
Billion cubic feet per day (Bcf/d) Billion cubic feet per day (Bcf/d)
400 EIA estimates* 75 Unlikely
Demand
LNG trade
300 Likely
Inter-regional pipeline trade
50 LNG demand
200
Domestic natural gas production
25
that is consumed domestically LNG liquefaction capacity –
100
existing or under construction
0 0
2010 2015 2020 2025 2010 2015 2020 2025
sources: BP Statistical Review; EIA; Joint Oil Data Initiative (JODI) 2020 year-to-date; BloombergNatural gas drilling productivity gains appeared to lower estimated
breakeven prices
As drillers became even more selective through the 2020 COVID-19 recession, dry natural gas well productivity rose per EIA
Estimated breakeven prices were below recent prices for major U.S. dry gas production regions per BTU Analytics
Natural gas well productivity –production per rig Natural gas estimated breakeven prices – July 2020
Dollars per million Btu (mmBtu)
Thousand cubic feet per day nat. gas-equivalent 0 1 2 3
30,000
July 2020
25,000 Haynesville
July 2019
Appalachia Henry Hub
20,000
Appalachia - Northeast PA spot price
15,000 Sept. 8, 2020
10,000 Haynesville
Appalachia - Southwest PA
5,000
0 Appalachia - Ohio
2016 2017 2018 2019 2020
source: EIA Drilling Productivity Report
*Half cycle breakevens assuming 10%
discount factor and play-specific costs
source: BTU AnalyticsProlific and cost-effective U.S. natural gas production has enabled record
consumption and penetration into electricity generation
Natural gas demand and supply have held up relatively well through the COVID-19 pandemic and with low prices are expected to
support record 38.9% penetration of natural gas into U.S. electricity generation in 2020 per EIA
U.S. Natural dry gas production and U.S. natural gas prices at Henry Hub
consumption by sector
Billion cubic feet per day (Bcf/d) EIA 2020 dollars per million Btu (mmBtu)
100 estimates 7 EIA
estimates
Net exports 6
Gas production
75 5
Industrial
4 Henry Hub
50
3
Electricity Generation
Futures
2
25 Transportation prices
1 (Sep. 8)
Residential & Commercial
0 0
2010 2012 2014 2016 2018 2020 2010 2012 2014 2016 2018 2020
sources: EIA; Bloomberg
source: EIARecord natural gas penetration into electricity generation has been a
positive development so far through 2020
Despite generally lower electricity demand due to COVID-19, natural gas gained market share for electricity generation across
nearly every region
U.S. electricity net generation by source U.S. natural gas consumption for electricity generation
2020 year-to-date through May, y/y%
Market share ISO-NE
+4.4%
100%
Northwest ISO-NY
Coal +11.1% +4.5%
75% SPP
+9.3% MISO
Nuclear CAISO +18.8% PJM
50% +13.3% +13.4%
Renewables
Southwest
Other +21.9%
25% Southeast
ERCOT +5.8%
Natural gas (0.2%)
0%
2016 2017 2018 2019 2020
source: EIA Electric Power Monthly sources: EIA; FERCAPI economics resources available at www.api.org
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