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, we will continue to watch upstream suppliers increasing their activity as production becomes more profitable. 

Independent oil traders have cautioned against the rising crude oil prices. Prices may prematurely reflect optimism for vaccine roll-out and confidence that OPEC’s production restrictions will hold. The Advisors have noticed signals indicating that crude oil is overbought, prompting a potential correction in store in the near future.  

For example, McNulty recognized that China increased their 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 which 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 which speaks to the challenges and uncertainties of the oil & gas industry nowadays.

McNulty adds that this has been expected for a while now. As cash flows from traditional energy flatten, there will be a burst of growth in ESG-certified cash flows.

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.

Mark Le Dain