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A Look Back At the News Stories That Shaped Energy in 2020
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The year 2020, by any standards, was one of unprecedented struggles for the Oil/Energy sector. While most businesses were hard hit by the COVID-induced lockdowns, the demand destruction and price plunge associated with energy was like no other.
Here's a quick recap of eight stories that shaped the energy landscape in 2020.
Biggest Drop in Oil Demand: The viral outbreak essentially obliterated oil demand in 2020. As the contagion spread across the world, fuel consumption slumped by as much as 30%. The lockdown restrictions destroyed the oil-intensive sectors of road transportation and aviation. In particular, commercial passenger flights remained seriously curtailed. As a result, the usage of distillates such as aviation fuel suffered with air travel essentially grounded.
Evidently, global oil demand saw the largest drop in history. Per the International Energy Agency ("IEA"), crude consumption fell by an astounding 8.8 million barrels per day year over year in 2020.
Shale Fracking Bust: The shale revolution greatly improved U.S. energy independence. But it also ushered in a flood of domestic supply. The breakneck in production growth continued to put pressure on prices to an extent where the majority of oil plays worked on razor-thin margins. There was always a concern that the frenzied activity out of the shale region was economically unsustainable in the long term given the massive capital burn, depressed returns and huge debts.
Then came the coronavirus pandemic and the subsequent hit to global oil demand and prices. With WTI crude futures falling below $30, $20, $10 and even going negative for a while, U.S. shale oil producers started feeling the heat. Even the Permian, where production had been on a tear until recently, was forced to go into negative growth amid unsustainable oil prices.Per EIA, crude output in these prolific shale plays likely decreased from more than 9 million barrels per day (MMbbl/d) in December 2019 to around 7.6 MMbbl/dby the end of 2020.
A Wave of Bankruptcies: The low oil and gas price put a significant proportion of the industry’s debt at distressed levels, pushing defaults among U.S. producers. A number of shale companies were already struggling to make a profit before the coronavirus had struck and therefore filed for bankruptcy when commodity realizations plunged amid a scarcity in available credit in the wake of the outbreak.
While some operators like Whiting Petroleum and Oasis Petroleum managed to emerge from Chapter 11 after wiping out most of the debt, it came at the cost of existing shareholders whose holdings were literally wiped out. Even an upstream entity as big as Chesapeake Energy — a shale pioneer and one of the largest U.S. natural gas producer — could not stave off the coronavirus-driven price decline and filed for bankruptcy.
Oil Goes Below Zero: In a bizarre turn of events, oil futures took a dive on Apr 20 and it was, well, worth less than nothing. On the NYMEX, May WTI crude — the price of a contract to deliver WTI oil next month — fell $55.90, or 306%, to finish at -$37.63 a barrel. That was the lowest-ever settlement for a front-month contract and the largest one-day drop on record.
At that point, the nearest-month oil contract suffered from a perfect storm of bad news – demand slump, the global coronavirus pandemic, a supply glut and last but not the least, the lack of significant storage capacity. In other words, the collapsing May contract indicated that traders and speculators were desperate to liquidate their contracts at whatever realization they could fetch. This way, they would at least avoid taking physical delivery of the commodity with no place to put it.
Supermajors No Longer the Dividend Linchpins: Investors are typically attracted to the big oil and gas companies thanks to their reliable dividends and defensive characteristics. These oil and gas industry kings usually consider high payouts as sacrosanct and do their utmost to continue paying them. In fact, the oil multinationals would rather slash capital expenditures, divest assets and increase borrowing than touch their dividend policies. But this time, things were different as the plunge in global commodity prices forced them to realign their strategy.
A number of energy companies — including some of the world’s biggest — announced coronavirus-related dividend cuts during the previous year. Schlumberger (SLB - Free Report) lowered its payout by 75%, while Zacks Rank #3 (Hold) Royal Dutch Shell cut its dividend for the first time since World War II to weather the historic oil price crash and save funds. Meanwhile, BP plc (BP - Free Report) was forced to slash its payout after a decade.
Largest Oil Production Cut in History: In April, a group of the world's biggest producers reached a landmark deal in a marathon webinar session, to curb output amid a glut of global oil supply that suppressed commodity prices.
Member countries of the OPEC+ group, looking to shore up prices, agreed to slash output by 10 million barrels per day — the largest in history — equal to roughly 10% of worldwide production. Riyadh committed to reducing oil production by 4 million barrels a day from an April baseline, or about 40% of the total, while Moscow lowered production by 2 million barrels a day. The plan took effect on May 1 and the initial reduction lasted for three months, following which it was relaxed.
Big Oil's Big Asset Write Downs: The Big Oil companies as a whole recorded some very large impairments in 2020 as the macro outlook for energy soured with crude and natural gas in oversupply amid the pandemic-ravaged demand. This compelled the energy majors to downgrade the value of their holdings to match the weak commodity price assumptions.
From American oil majors ExxonMobil (XOM - Free Report) and Chevron (CVX - Free Report) to their European counterparts Shell, BP, Eni SpA (E - Free Report) and TOTAL SE — all were forced to book billions of dollars of impairments, having substantially overpaid for assets bought during the past decade only to find their price outlooks being hammered
Natural Gas Craters to 1995 Levels: Natural gas futures collapsed to a 25-year low below $1.50 per MMBtu in late June, due in part to an ongoing supply glut made worse by the coronavirus-induced drop off in usage.
The pandemic actually helped natural gas prices recover somewhat on prospects of lower volumes. Per industry observers, the brake in skyrocketing shale oil production growth — tied to the crude price collapse — also limited the associated gas output, thereby snapping the massive supply glut. However, the perceived economic benefit of the pandemic was offset by a slowdown in the fuel’s consumption due to the crisis.
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Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.
Image: Bigstock
A Look Back At the News Stories That Shaped Energy in 2020
The year 2020, by any standards, was one of unprecedented struggles for the Oil/Energy sector. While most businesses were hard hit by the COVID-induced lockdowns, the demand destruction and price plunge associated with energy was like no other.
Here's a quick recap of eight stories that shaped the energy landscape in 2020.
Biggest Drop in Oil Demand: The viral outbreak essentially obliterated oil demand in 2020. As the contagion spread across the world, fuel consumption slumped by as much as 30%. The lockdown restrictions destroyed the oil-intensive sectors of road transportation and aviation. In particular, commercial passenger flights remained seriously curtailed. As a result, the usage of distillates such as aviation fuel suffered with air travel essentially grounded.
Evidently, global oil demand saw the largest drop in history. Per the International Energy Agency ("IEA"), crude consumption fell by an astounding 8.8 million barrels per day year over year in 2020.
Shale Fracking Bust: The shale revolution greatly improved U.S. energy independence. But it also ushered in a flood of domestic supply. The breakneck in production growth continued to put pressure on prices to an extent where the majority of oil plays worked on razor-thin margins. There was always a concern that the frenzied activity out of the shale region was economically unsustainable in the long term given the massive capital burn, depressed returns and huge debts.
Then came the coronavirus pandemic and the subsequent hit to global oil demand and prices. With WTI crude futures falling below $30, $20, $10 and even going negative for a while, U.S. shale oil producers started feeling the heat. Even the Permian, where production had been on a tear until recently, was forced to go into negative growth amid unsustainable oil prices.Per EIA, crude output in these prolific shale plays likely decreased from more than 9 million barrels per day (MMbbl/d) in December 2019 to around 7.6 MMbbl/dby the end of 2020.
A Wave of Bankruptcies: The low oil and gas price put a significant proportion of the industry’s debt at distressed levels, pushing defaults among U.S. producers. A number of shale companies were already struggling to make a profit before the coronavirus had struck and therefore filed for bankruptcy when commodity realizations plunged amid a scarcity in available credit in the wake of the outbreak.
While some operators like Whiting Petroleum and Oasis Petroleum managed to emerge from Chapter 11 after wiping out most of the debt, it came at the cost of existing shareholders whose holdings were literally wiped out. Even an upstream entity as big as Chesapeake Energy — a shale pioneer and one of the largest U.S. natural gas producer — could not stave off the coronavirus-driven price decline and filed for bankruptcy.
Oil Goes Below Zero: In a bizarre turn of events, oil futures took a dive on Apr 20 and it was, well, worth less than nothing. On the NYMEX, May WTI crude — the price of a contract to deliver WTI oil next month — fell $55.90, or 306%, to finish at -$37.63 a barrel. That was the lowest-ever settlement for a front-month contract and the largest one-day drop on record.
At that point, the nearest-month oil contract suffered from a perfect storm of bad news – demand slump, the global coronavirus pandemic, a supply glut and last but not the least, the lack of significant storage capacity. In other words, the collapsing May contract indicated that traders and speculators were desperate to liquidate their contracts at whatever realization they could fetch. This way, they would at least avoid taking physical delivery of the commodity with no place to put it.
Supermajors No Longer the Dividend Linchpins: Investors are typically attracted to the big oil and gas companies thanks to their reliable dividends and defensive characteristics. These oil and gas industry kings usually consider high payouts as sacrosanct and do their utmost to continue paying them. In fact, the oil multinationals would rather slash capital expenditures, divest assets and increase borrowing than touch their dividend policies. But this time, things were different as the plunge in global commodity prices forced them to realign their strategy.
A number of energy companies — including some of the world’s biggest — announced coronavirus-related dividend cuts during the previous year. Schlumberger (SLB - Free Report) lowered its payout by 75%, while Zacks Rank #3 (Hold) Royal Dutch Shell cut its dividend for the first time since World War II to weather the historic oil price crash and save funds. Meanwhile, BP plc (BP - Free Report) was forced to slash its payout after a decade.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Largest Oil Production Cut in History: In April, a group of the world's biggest producers reached a landmark deal in a marathon webinar session, to curb output amid a glut of global oil supply that suppressed commodity prices.
Member countries of the OPEC+ group, looking to shore up prices, agreed to slash output by 10 million barrels per day — the largest in history — equal to roughly 10% of worldwide production. Riyadh committed to reducing oil production by 4 million barrels a day from an April baseline, or about 40% of the total, while Moscow lowered production by 2 million barrels a day. The plan took effect on May 1 and the initial reduction lasted for three months, following which it was relaxed.
Big Oil's Big Asset Write Downs: The Big Oil companies as a whole recorded some very large impairments in 2020 as the macro outlook for energy soured with crude and natural gas in oversupply amid the pandemic-ravaged demand. This compelled the energy majors to downgrade the value of their holdings to match the weak commodity price assumptions.
From American oil majors ExxonMobil (XOM - Free Report) and Chevron (CVX - Free Report) to their European counterparts Shell, BP, Eni SpA (E - Free Report) and TOTAL SE — all were forced to book billions of dollars of impairments, having substantially overpaid for assets bought during the past decade only to find their price outlooks being hammered
Natural Gas Craters to 1995 Levels: Natural gas futures collapsed to a 25-year low below $1.50 per MMBtu in late June, due in part to an ongoing supply glut made worse by the coronavirus-induced drop off in usage.
The pandemic actually helped natural gas prices recover somewhat on prospects of lower volumes. Per industry observers, the brake in skyrocketing shale oil production growth — tied to the crude price collapse — also limited the associated gas output, thereby snapping the massive supply glut. However, the perceived economic benefit of the pandemic was offset by a slowdown in the fuel’s consumption due to the crisis.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2021.
Click here for the 6 trades >>