‘I Am An Oil Man’: How Long Before Jerome Powell Gets Into The Oil And Gas Business?

Donald Trump on Wednesday resorted to a laughably transparent tactic to score points with his notoriously fervent base and, perhaps as a bonus, give a temporary fillip to floundering oil prices: He threatened to destroy Iran’s notorious fleet of what might as well be speed boats, which habitually harass vessels in one of the world’s most critical shipping lanes.

“I have instructed the United States Navy to shoot down and destroy any and all Iranian gunboats if they harass our ships at sea”, Trump declared, in a morning tweet.

Most obviously, one cannot shoot “down” a boat. Boats don’t generally fly. More importantly, though, Americans should understand that this isn’t really “news”. The Trump administration has threatened the IRGC navy (and “navy” isn’t really the right word) on too many occasions to count. Trump is after two things: Giving crude prices a bump and, crucially, scoring political points by pivoting back to the 2016 playbook ahead of the election. Other recent examples of that pivot include the “temporary” immigration ban, the defunding of the World Health Organization and the COVID-19 allegations aimed at China.

So, that’s that. And when it comes to oil, unless Trump actually does fire on Iranian boats (by no means out of the realm of the possible), there is zero chance that one tweet is going to do what 9.7 million barrels per day in promised OPEC+ production cuts couldn’t – namely, prevent prices from plunging.

The White House has variously suggested this week’s historic moves in oil prices are a temporary phenomenon, but the fundamental backdrop is the worst it’s ever been. There’s no demand, massive supply and we’re almost totally out of storage, not just stateside, but globally.

The EIA on Wednesday reported a 15.02 million barrel stock build. It was the fourth consecutive massive weekly build. Overall, stockpiles in the US have risen for 13 weeks running.

Demand has absolutely collapsed. Total products supplied over the last four weeks averaged just 15 million barrels a day. That’s down 25.4% YoY.

The four-week average for motor gasoline product supplied was just 5.5 million barrels a day. That represents a 41% plunge.

Jet fuel product supplied cratered nearly 54%, which makes sense because we’re currently “off-air”, so to speak. Below is an updated visual using data from the Transportation Security Administration which shows the drop-off in the number of people moving through security portals at US airports.

You get the point. This is largely hopeless. This glut isn’t going to clear for months upon months. And that means bankruptcies, credit events and economic hardship on an unimaginable scale for America’s energy industry.

“The potential for next to no revenue in the second and third quarters this year may mean that large US oil explorers burn through $7 billion in cash”, Bloomberg writes, citing Evercore, whose analysts predict that by the time this bust has run its course, a third of publicly traded shale explorers may ultimately exit the market “one way or another”.

Apparently, new US oil wells are seen falling 87% by the end of 2020. That’s based on IHS Markit’s estimates.

Obviously, nobody (or next to nobody) will be willing to lend to many of these companies. Large, small and everything in between, they’re all going to be cut off from capital.

So, what’s next? Well, maybe the Fed can step in. If you ask Cowen’s Chris Krueger, the central bank may have to lend to the sector in order to stave off some manner of apocalyptic, scorched earth outcome.

In a new note, Krueger calls the Fed the “most likely potential safety line” for US energy. “Loan facility programs are currently limited to investment grade credit though if the goal is to preserve jobs in the short term, then there needs to be help for high yield”, he says.

The Fed is there to support fallen angels, but that may not be enough.

It’s also possible that, although the administration hasn’t explicitly said bailouts are in the cards, some kind of package like that offered to airlines will eventually materialize. “Any direct intervention from Treasury would likely come with significant policy strings”, Krueger went on to say.

There have been no shortage of jokes in financial circles over the past 48 hours about the Fed stepping in to support oil prices. If you thought the “moral hazard” cacophony was deafening around the Fed’s decision to shore up credit markets, just imagine the incredulity when Jerome Powell starts loaning to energy companies. Or else allowing banks to post energy assets as collateral for cash to avert a scenario that finds Wall Street getting into the business of managing oil and gas fields.

Or maybe it’s just best if the Fed buys some oil ETFs. After all, there are plenty of “bargains” in the market right now, although they may not be “in the market” for long.

“There are 233 oil-related ETPs in the world, 1/4 of which [are] leveraged and a dozen of them are trading below $1”, Bloomberg’s Eric Balchunas notes. “What a motley crew”.

(BBG)

I so look forward to the post-FOMC press conference when Powell channels his inner Daniel Day-Lewis.

“I am an oil man, ladies and gentlemen”, the Fed Chair began, matter-of-factly, as reporters looked on. “I have numerous concerns spread across this state. I have many wells flowing at many thousand barrels per day”.