Does a Correction Loom for the Oil Market?

In this week’s Rigzone market commentary, Validere’s Mark Le Dain sat down with Matthew V. Veazey at Rigzone to discuss the continued rising demand for crude oil alongside Energy Advisor Phil Kangas and Houston-based Principal Tom McNulty. Keep reading for details. 

As prices rise, so have active rig counts, reaching their highest numbers since last spring. With surging crude oil prices causing production to become more profitable, we will continue to watch upstream suppliers increasing their activity. 

Independent oil traders such as Vitol SA and Gunvor Group Ltd. have cautioned against the rising crude oil prices. They believe the prices may prematurely reflect optimism for vaccine roll-out and confidence that OPEC’s production restrictions will hold. The Advisors have noticed vital indicators that signal crude oil is overbought, and they predict a correction may be in store in the near future.  

Using China as an example, McNulty recognized that China increased their monthly crude imports by 20% in January. To this point, global demand will not be stalled, and it will cause increased energy production across all channels. 

Validere’s Mark Le Dain added that Propane is at a multi-year high and supporting product demand. This level of demand may last longer than historical seasons. 

To read more about Rigzone’s weekly commentary preview, click here.

Validere’s Mark Le Dain also shared his thoughts on the majors getting credit rating downgrades in last week’s review. 

Year-end earnings reports were bleak results for most oil & gas majors in 2020. ExxonMobil announced the largest loss in its history – approximately $20.1 billion for the fourth quarter. Even firms that posted modest profits were down from last year. Most of the losses took the form of write-downs on company assets’ value, reflecting a downgraded valuation of reserves. 

These losses were not only felt by Big Oil companies; oil & gas bankruptcies nearly doubled in the U.S. in 2020. It was no surprise that the industry suffered a dramatic job loss in 2020. 

As a result, ExxonMobil, Chevron, Shell, Total and others were all placed on “credit watch” by the S&P Global Ratings agency. This “credit watch” reflected their revised risk assessment from intermediate risk to moderately high risk due to the challenges and uncertainties of the oil & gas industry.

McNulty adds that this has been expected since last year. As cash flows from traditional energy flatten, there will be a burst of growth in ESG-certified cash flows that will offset the decline in the traditional energy cash flow.

Also, Validere’s Mark Le Dain mentions that the cold weather reaching the far south will create a robust gas market for a longer period, given the capital budgets at this point. 

They continued to discuss market surprises. To read more, click here.