News & Updates: Port Bureau News: August 2020

August 2020 Commerce Club Featuring Peter Fasullo, En*Vantage, Inc.

Thursday, August 27, 2020  
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The Impact of COVID-19 on U.S. Energy Markets: Implications for Texas Gulf Coast

Peter Fasullo, Principal of En*Vantage, Inc., painted a pragmatic picture of U.S. energy markets at the Port Bureau’s Virtual Commerce Club on August 13, 2020. Hosted via Zoom, Fasullo presented “The Impact of Covid-19 on U.S. Energy Markets: Implications for Texas Gulf Coast”, followed by a question and answer session for webinar participants.

Prior to the onset of the COVID-19 pandemic, the U.S. was in what Fasullo described as a “supply push environment” for hydrocarbons. Because of the shale boom, the U.S. had become a major exporter of oil, LNG, NGLs, refined products and petrochemicals. But the worldwide lockdowns brought on a severe drop in refined product demand, leading oil refineries to reduce operating rates. Crude oil inventories quickly increased, causing prices to collapse. The price collapse was compounded by the Saudi/Russia price war in April. U.S. producers have shut in wells and drastically reduced drilling.

Discussing the downturn’s negative impact on crude oil, gasoline, diesel and jet fuel demand, Fasullo said,  “U.S. gasoline demand has been the one refined product that has bounced, but it still nowhere near where it was in pre-COVID days. We’re still about 3% from that peak. That’s because if you don’t want to fly or do other mass means of transportation, you can at least drive.”

Looking at U.S. crude oil exports, Fasullo pointed out the modest increase in refined products, which he attributes to other countries opening up and buying from the U.S. “Other countries may not be running their refineries at higher rates, but they are buying cheaper fuel from us,” noted Fasullo. “We’ve been able to keep up our exports in refined products.”

Fasullo said U.S. crude oil exports are down 23% and refined products are up 1% from their pre-COVID peaks. U.S. NGL exports are off 15% and LNG exports are off 65% from peak. Over 90% of U.S. crude oil exports, 85% refined product exports, 70% of NGL exports, and 80% of LNG exports are from Gulf Coast export terminals.

High debt is a grim factor for many Energy & Production (E&P) companies as they navigate the downturn. “Pre-COVID, many U.S. E&P companies borrowed heavily to fund growth. They weren’t necessarily focusing on returns; they really wanted to increase their volumes,” explained Fasullo. Prior to the pandemic outbreak, 42 E&P companies filed bankruptcy in 2019. Post pandemic onset, 31 producers have filed Chapter 11, as of the end of July. “More MNA [mergers and acquisitions] activities will pick up, causing industry consolidation. Many E&P companies still face debt maturity soon,” added Fasullo.

“I am frequently asked: ‘what is breakeven?’, said Fusullo, as he showed breakeven and shut-in prices for shale plays based on a producer survey by the Dallas Federal Reserve. For new wells, an average of $50 WTI is needed to reach breakeven; to cover operating expenses, between $23 and $36 WTI, depending on the basin.

While low prices have typically been the stimulus to demand, Fasullo believes a vaccine or therapeutic solution to COVID-19 will bring the rebound to energy markets. Referring to a forecast in an EIA (Energy Information Administration) chart of oil production/consumption, Fasullo spoke to two potential demand recovery outcomes based on the time required for an effective cure to the virus.

“If we get an effective cure [by 2021], then oil demand should rebound rapidly. We should see gasoline demand be the first to rebound – we’ve already seen that to some extent - followed by diesel and jet prices. We could see crude prices temporarily spike under these conditions,” said Fasullo. “If we don’t get an effective cure, then oil demand growth will be impeded for a while.”

Gulf Coast Implications

While many downstream energy assets on the Gulf Coast will be underutilized for some time to come, Fasullo did have some good news. “If you look at the what’s on the Gulf Coast, particularly in the assets, they all are operated and owned by strong, well-capitalized energy and petrochemical companies. These guys have the staying-power to weather the downturn.”

Fasullo also stressed the that upstream resource base has not changed. “When prices do recover, we do have the reserves there that can really rachet things back up,” noting that oil reserves can cover 45 years of  U.S. demand, and gas reserves can cover 91 years of U.S. gas demand.

In the greater Houston area, energy assets and infrastructure will continue to play a prominent role. “Our area has the greatest ability to aggregate and store large volumes of crude oil, natural gas, refined products, NGLs and petrochemicals that supports a huge amount exports and refining operations. Also, where we are, compared to South Texas and even Louisiana, we offer energy producers and customers the greatest market optionality. I am optimistic the greater Houston area will really get through this eventually,” he concluded.

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