Power & Energy Q1 2020

U.S. Futures Extend Slide While WTI Oil Crashes

Due to a surplus in supply and a lack of demand, the bottom has fallen out on oil prices. WTI’s on crude oil plunged to lows not seen since 2001. As May contracts roll forward OPEC’s output cuts likely won’t take effect until June. The U.S. Oil Fund has decided to shift it’s $3.8 billion fund from a 100% first-dated contract position and roll it forward to only an 80% first-month contract. This has led to a glut in open contracts for May which caused the price of oil to plunge more.¹

Oil Plunges by Record to Below $11 With Storage Rapidly Filling

The biggest drop in oil prices sent the price of a barrel under $11, down 40% from a day earlier. Even after OPEC+ came to an agreement on output limits, the market is still oversupplied and storage tanks all over the world have begun to fill up as the price of oil hit lows not seen since 2001. US crude explorers have shut down 13% for their American drilling fleet last week because there are no buyers for the oil that is currently being pumped.²

Thirst for Oil Vanishes, Leaving Industry in Chaos

The first quarter of 2020 has been tumultuous for the oil markets. After Saudi Arabia decided to slash production limits, oil prices plummeted. Due to the coronavirus, billions of people are stuck at home, so crude oil demand has plummeted as people stopped driving, planes stopped flying and the economy shuddered to a halt.

On April 10^th the Energy ministers of the G20 met to discuss the situation. Russia, Saudi Arabia and the U.S. led the G20 coalition to withhold 9.7 million barrel of crude per day from the markets. Prices per barrel of crude are below what is needed for wells to operate without losing money. At $20 per barrel of West Texas crude, operators are expected to lose $200 million per week.^{3 4}

Energy Companies Facing Challenges Amid a Volatile Market Outlook

Growing concerns for the oil price and energy market are causing lenders to worry. Bankruptcies in the energy market are expected to rise in 2020 due to the new developments between Russia and Saudi Arabia. Production companies using high leverage are the first ones at risk for filing bankruptcy. Lenders are becoming more alert and will reduce borrowing activities and shrink valuations.⁵

Recent Breakthrough into Splitting Water into its Parts and Renewable Energy

A recent breakthrough in water splitting replaces the use of platinum and iridium with nickel and iron, which can be found naturally in abundance that enables the splitting of the oxygen and hydrogen molecules. Water splitting technology uses electricity to split water into hydrogen and oxygen. This process can be used to create hydrogen fuel at a lower cost. Potential applications for hydrogen energy include large scale energy conversion to fuel cells for cars. The hydrogen generation market is growing rapidly and will reach $199.1 billion by 2023.⁶

Carbon Capture Winning Fans in Oil Industry

More companies are betting on carbon capture technology, citing that it may finally justify the high costs. Exxon Mobil Corp., Occidental Petroleum Crop., and Chevron Corp. are among the leaders in this field. These companies invest in carbon capture technology and repurpose the gas. This creates a win-win for the company because it can reduce their environmental footprint and use the captured gas to release underground trapped oil. This process of using carbon to release underground oil is known as enhanced oil recovery. Experts claim there may be a market for the molecule in the coming decades, which justifies the carbon capture investments.⁷

Challenges Ahead for Energy Companies

Many companies within the energy industry have been issuing junk bonds to finance their activities and investments. That strategy has backfired because capital is drying up, debt buyers are worried, capital is getting more expensive, and oil prices and energy company stock prices have fallen nearly two-thirds from their most recent high. The energy companies are now struggling to make their interest payments as of mid-March 2020. Experts warn that with a weaker economy the businesses might end up needing to file for bankruptcy.⁸