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The week in review
Price Point Weekly
Global oil and gas market update
17 August 2020
Andy Brogan
EY Global Oil & Gas Leader
+44 20 7951 7009
abrogan@uk.ey.com
Derek Leith
EY Global Oil & Gas
Tax Leader
+44 12 2465 3246
dleith@uk.ey.com
John Hartung
EY Americas Oil & Gas
SaT Leader
+1 713 751 2114
john.hartung@parthenon.com
Jeff Williams
EY Global Oil & Gas
Advisory Leader
+1 713 750 5916
jeff.williams@ey.com
Gary Donald
EY Global Oil & Gas
Assurance Leader
+44 20 7951 7518
gdonald@uk.ey.com
The week ahead
For the most part, the market has sifted through the aftermath of Q2 and companies have reconciled their balance sheets to the potential long-term impacts of
the COVID-19 pandemic and energy transition. Attention will focus now on the standard questions about demand restoration, production, storage balance,
refinery utilization and other matters tied to supply-demand balance. LNG demand and natural gas production will be of particular interest. Hot weather has
already shown the potential to move the markets. OPEC members’ compliance with production agreements, stable US production and steadily increasing refinery
utilization are positive signs, but the markets have yet to see past the horizon to a point where inventories return to normal and the markets reckon with the
fallout from the crash in upstream investment.
This was a week of continued stability, with even strength in oil and gas commodity markets. Despite the spread of COVID-
19 in the US and Latin America (stable, but at 150,000 new cases per day), traders seem confident in economic recovery
and energy demand restoration. Oil prices barely moved. In some circles, speculation is growing that underinvestment
upstream could lead to tight supplies and price spikes once the inventories built in the early stages of the crisis have
cleared. Henry Hub natural gas built on the strength of last week’s remarkable run. September gas future prices are now
13% higher than early March and 39% higher than late June, when the full impact of the collapse in global LNG trade was
being felt. The rise in gas prices comes as US gas storage continues to build at above average rates. Last week, injections
totaled 58 BCF compared with a five-year average of 44 BCF and a year-ago injection of 51 BCF. Apparently, the market
sees signs of hope in the decline in LNG cargo cancellations, the recent heat wave in the US, and increases in power
demand around the world. In the intermediate term, it is inevitable that reduced drilling in oil-focused shale basins will
impact associated gas production. According to the EIA Drilling Productivity report, about 30% of shale gas production
comes from oil-focused regions where production from a typical well falls by 40% in a year and the number of working rigs
has fallen by 70% since March.
Commodities
Oil 1%
Natural Gas 7%
Equities
IOC 1%
NA Independent 0%
Intl Independent 0%
OFS -1%
S&P 500 0%
5.1 9.1
25.1
59.6
16.4
8.8
-14.2
Jan Feb March April May June July
Crude oil stock change 2020 YTD (mb)
Source: US Energy Information Administration
Higher-than-expected draws in oil stocks may signal recovery
• Falling oil output and rising demand has led to higher-than-
expected inventory withdrawals in the US. July was the first
month in the year to witness net withdrawals (of 14 million barrels
or mb) from US crude stocks.
• Citing early signs in demand recovery, OPEC+ has eased its
production cuts by 2 million barrels per day (mbpd) to 7.7 mbpd
from August 2020.
• The outlook for oil markets remains cautiously optimistic in view
of increasing production in OPEC+ countries and potential risks to
oil demand growth as COVID-19 infections rise globally.Note: Crude oil stocks includes SPR
0
75
150
225
300
375
CBOE crude oil volatility index
Source: CBOE
Oil majors’ trading business gains partially offset losses
• Oil markets have witnessed unprecedented volatility in 2020 – the CBOE Crude
Oil Volatility Index peaked at 325 in April when US oil futures prices turned
negative for the first time. During the quarter overall, the index averaged 105,
well above the average of 68 during the first quarter and 33 a year ago.
• Several oil majors, particularly the Europeans, have cashed in on volatility
through their trading business, somewhat narrowing operating losses that
amounted to US$18.7b.
• The sustainability of trading profits has always been questioned. Volatility has
returned to pre-crisis levels and, absent more disruption, the size of the
opportunity will shrink. Also, it is reasonable to expect competition in the trading
space will increase as more companies enter in search of ways to offset the drag
on the business from energy transition.
EY | Assurance | Tax | Strategy and Transactions | Consulting
About EY
EY is a global leader in assurance, tax, strategy, transaction and
consulting services. The insights and quality services we deliver
help build trust and confidence in the capital markets and in
economies the world over. We develop outstanding leaders who
team to deliver on our promises to all of our stakeholders. In so
doing, we play a critical role in building a better working world
for our people, for our clients and for our communities.
EY refers to the global organization, and may refer to one or
more, of the member firms of Ernst & Young Global Limited,
each of which is a separate legal entity. Ernst & Young Global
Limited, a UK company limited by guarantee, does not provide
services to clients. Information about how EY collects and uses
personal data and a description of the rights individuals have
under data protection legislation are available via
ey.com/privacy. For more information about our organization,
please visit ey.com.
The oil and gas sector is constantly changing. Increasingly
uncertain energy policies, geopolitical complexities, cost
management and climate change all present significant
challenges. EY’s Global Oil & Gas Sector supports a global
network of more than 10,000 oil and gas professionals with
extensive experience in providing assurance, consulting,
strategy, tax and transaction services across the upstream,
midstream, downstream and oil field subsectors. The Sector
team works to anticipate market trends, execute the mobility of
our global resources and articulate points of view on relevant
sector issues. With our deep sector focus, we can help your
organization drive down costs and compete more effectively.
© 2020 EYGM Limited.
All Rights Reserved.
EYGM Number 005703-20Gbl
ED NONE
This material has been prepared for general informational
purposes only and is not intended to be relied upon as legal,
accounting, tax or other professional advice. Please refer to
your advisors for specific advice.
ey.com/oilandgas

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EY Price Point 8.17.20

  • 1. The week in review Price Point Weekly Global oil and gas market update 17 August 2020 Andy Brogan EY Global Oil & Gas Leader +44 20 7951 7009 abrogan@uk.ey.com Derek Leith EY Global Oil & Gas Tax Leader +44 12 2465 3246 dleith@uk.ey.com John Hartung EY Americas Oil & Gas SaT Leader +1 713 751 2114 john.hartung@parthenon.com Jeff Williams EY Global Oil & Gas Advisory Leader +1 713 750 5916 jeff.williams@ey.com Gary Donald EY Global Oil & Gas Assurance Leader +44 20 7951 7518 gdonald@uk.ey.com The week ahead For the most part, the market has sifted through the aftermath of Q2 and companies have reconciled their balance sheets to the potential long-term impacts of the COVID-19 pandemic and energy transition. Attention will focus now on the standard questions about demand restoration, production, storage balance, refinery utilization and other matters tied to supply-demand balance. LNG demand and natural gas production will be of particular interest. Hot weather has already shown the potential to move the markets. OPEC members’ compliance with production agreements, stable US production and steadily increasing refinery utilization are positive signs, but the markets have yet to see past the horizon to a point where inventories return to normal and the markets reckon with the fallout from the crash in upstream investment. This was a week of continued stability, with even strength in oil and gas commodity markets. Despite the spread of COVID- 19 in the US and Latin America (stable, but at 150,000 new cases per day), traders seem confident in economic recovery and energy demand restoration. Oil prices barely moved. In some circles, speculation is growing that underinvestment upstream could lead to tight supplies and price spikes once the inventories built in the early stages of the crisis have cleared. Henry Hub natural gas built on the strength of last week’s remarkable run. September gas future prices are now 13% higher than early March and 39% higher than late June, when the full impact of the collapse in global LNG trade was being felt. The rise in gas prices comes as US gas storage continues to build at above average rates. Last week, injections totaled 58 BCF compared with a five-year average of 44 BCF and a year-ago injection of 51 BCF. Apparently, the market sees signs of hope in the decline in LNG cargo cancellations, the recent heat wave in the US, and increases in power demand around the world. In the intermediate term, it is inevitable that reduced drilling in oil-focused shale basins will impact associated gas production. According to the EIA Drilling Productivity report, about 30% of shale gas production comes from oil-focused regions where production from a typical well falls by 40% in a year and the number of working rigs has fallen by 70% since March. Commodities Oil 1% Natural Gas 7% Equities IOC 1% NA Independent 0% Intl Independent 0% OFS -1% S&P 500 0% 5.1 9.1 25.1 59.6 16.4 8.8 -14.2 Jan Feb March April May June July Crude oil stock change 2020 YTD (mb) Source: US Energy Information Administration Higher-than-expected draws in oil stocks may signal recovery • Falling oil output and rising demand has led to higher-than- expected inventory withdrawals in the US. July was the first month in the year to witness net withdrawals (of 14 million barrels or mb) from US crude stocks. • Citing early signs in demand recovery, OPEC+ has eased its production cuts by 2 million barrels per day (mbpd) to 7.7 mbpd from August 2020. • The outlook for oil markets remains cautiously optimistic in view of increasing production in OPEC+ countries and potential risks to oil demand growth as COVID-19 infections rise globally.Note: Crude oil stocks includes SPR 0 75 150 225 300 375 CBOE crude oil volatility index Source: CBOE Oil majors’ trading business gains partially offset losses • Oil markets have witnessed unprecedented volatility in 2020 – the CBOE Crude Oil Volatility Index peaked at 325 in April when US oil futures prices turned negative for the first time. During the quarter overall, the index averaged 105, well above the average of 68 during the first quarter and 33 a year ago. • Several oil majors, particularly the Europeans, have cashed in on volatility through their trading business, somewhat narrowing operating losses that amounted to US$18.7b. • The sustainability of trading profits has always been questioned. Volatility has returned to pre-crisis levels and, absent more disruption, the size of the opportunity will shrink. Also, it is reasonable to expect competition in the trading space will increase as more companies enter in search of ways to offset the drag on the business from energy transition.
  • 2. EY | Assurance | Tax | Strategy and Transactions | Consulting About EY EY is a global leader in assurance, tax, strategy, transaction and consulting services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Information about how EY collects and uses personal data and a description of the rights individuals have under data protection legislation are available via ey.com/privacy. For more information about our organization, please visit ey.com. The oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Sector supports a global network of more than 10,000 oil and gas professionals with extensive experience in providing assurance, consulting, strategy, tax and transaction services across the upstream, midstream, downstream and oil field subsectors. The Sector team works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively. © 2020 EYGM Limited. All Rights Reserved. EYGM Number 005703-20Gbl ED NONE This material has been prepared for general informational purposes only and is not intended to be relied upon as legal, accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com/oilandgas