The Oil Industry Needs A U.S./China Trade Deal

© 2019 Bloomberg Finance LP

China's decision on September 11 to waive tariffs on an array of U.S. exports came as welcome news to a variety of American businesses, as did the Trump Administration's reciprocal action of delaying new tariffs on Chinese goods scheduled to go into effect on October 1 for two weeks while trade talks between the world's two largest economies resume. The moves revived hopes that China may now be getting serious about reaching a new trade agreement with the U.S. in the coming months, as its economy has borne the brunt of damage in this 18-month-long tit for tat exchange.

In the U.S., no industry stands to benefit more from an ultimate agreement between the two countries than agriculture, which has suffered greatly due to Chinese tariffs on soybeans and other exports. Indeed, as I was putting this piece together on the morning of September 12, President Trump tweeted that "It is expected that China will be buying large amounts of our agricultural products!", but provided no further details. Presumably, or hopefully, those will come later.

But the domestic oil and gas industry would have to come in at a close second in this particular measure, given that demand for its production and ongoing ability to increase U.S. exports relies on economic growth in China and other parts of the world.

Thanks largely to this year's fairly dramatic slowing of China's economic growth, global demand estimates for crude oil have fallen rapidly throughout 2019.  The U.S. Energy Information Administration (EIA), which estimated in January that global demand for this year would increase by a very healthy 1.5 million barrels of oil per day (bopd), lowered that estimate this week to just .9 million bopd. Both OPEC and the International Energy Agency (IEA) have also dramatically reduced their own demand growth estimates as 2019 has progressed.

Market concerns about this slowing economic growth have served to keep crude prices for West Texas Intermediate (WTI)  range-bound between $52/bbl and $58/bbl in recent months, despite the persistence of other, more-bullish price signals. This sub-optimal price picture has combined with pressure from investors to slow U.S. drilling and production growth.

The Enverus Daily Rig Count came in at 921 active rigs on September 10, down by 247 rigs over the last 10 months. Meanwhile, frac spreads are down significantly as well, with the latest report from Primary Vision noting that the level of frac spread activity has fallen nationally by 20% since the Spring, and has closely followed the drop in the drilling rig count throughout 2019.

All of these factors have led Rystad Energy to issue a report on September 11 warning that the service industry as a whole could experience not just further slowing of the growth it has seen over the last three years, but an outright contraction by as much as 4% during 2020. Rystad projects the service market to grow by 2%, to $647 billion, in 2019, but to then drop to an estimated $621 billion in 2020.

“This new market view stands in stark contrasts to what we previously forecasted when oil price estimates stood around $70 for 2020. At that oil price, the service market was expected to grow by 2%, held up by offshore and shale. However, downside risks have been mounting in the oil market, and we could face additional headwinds in 2020,” said Audun Martinsen, head of oilfield services research for Rystad.

The only real way to reverse this overall slowing of the domestic oil and gas business's growth would be for the price for WTI to break out of its current range and move up closer to $65 or $70/bbl. That will only happen if global demand increases back to the levels foreseen by the EIA, OPEC and the IEA back in January.

None of that can happen unless the U.S. and China reach a new trade agreement that reduces or eliminates existing tariffs and stimulates economic growth. Thus, everyone in the U.S. industry is hoping that the olive branch extended this week by China is a signal of a good-faith intent to get serious in the negotiations, and not just another head-fake by the Xi Jinping regime.

 

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© 2019 Bloomberg Finance LP

China's decision on September 11 to waive tariffs on an array of U.S. exports came as welcome news to a variety of American businesses, as did the Trump Administration's reciprocal action of delaying new tariffs on Chinese goods scheduled to go into effect on October 1 for two weeks while trade talks between the world's two largest economies resume. The moves revived hopes that China may now be getting serious about reaching a new trade agreement with the U.S. in the coming months, as its economy has borne the brunt of damage in this 18-month-long tit for tat exchange.

In the U.S., no industry stands to benefit more from an ultimate agreement between the two countries than agriculture, which has suffered greatly due to Chinese tariffs on soybeans and other exports. Indeed, as I was putting this piece together on the morning of September 12, President Trump tweeted that "It is expected that China will be buying large amounts of our agricultural products!", but provided no further details. Presumably, or hopefully, those will come later.

But the domestic oil and gas industry would have to come in at a close second in this particular measure, given that demand for its production and ongoing ability to increase U.S. exports relies on economic growth in China and other parts of the world.

Thanks largely to this year's fairly dramatic slowing of China's economic growth, global demand estimates for crude oil have fallen rapidly throughout 2019.  The U.S. Energy Information Administration (EIA), which estimated in January that global demand for this year would increase by a very healthy 1.5 million barrels of oil per day (bopd), lowered that estimate this week to just .9 million bopd. Both OPEC and the International Energy Agency (IEA) have also dramatically reduced their own demand growth estimates as 2019 has progressed.

Market concerns about this slowing economic growth have served to keep crude prices for West Texas Intermediate (WTI)  range-bound between $52/bbl and $58/bbl in recent months, despite the persistence of other, more-bullish price signals. This sub-optimal price picture has combined with pressure from investors to slow U.S. drilling and production growth.

The Enverus Daily Rig Count came in at 921 active rigs on September 10, down by 247 rigs over the last 10 months. Meanwhile, frac spreads are down significantly as well, with the latest report from Primary Vision noting that the level of frac spread activity has fallen nationally by 20% since the Spring, and has closely followed the drop in the drilling rig count throughout 2019.

All of these factors have led Rystad Energy to issue a report on September 11 warning that the service industry as a whole could experience not just further slowing of the growth it has seen over the last three years, but an outright contraction by as much as 4% during 2020. Rystad projects the service market to grow by 2%, to $647 billion, in 2019, but to then drop to an estimated $621 billion in 2020.

“This new market view stands in stark contrasts to what we previously forecasted when oil price estimates stood around $70 for 2020. At that oil price, the service market was expected to grow by 2%, held up by offshore and shale. However, downside risks have been mounting in the oil market, and we could face additional headwinds in 2020,” said Audun Martinsen, head of oilfield services research for Rystad.

The only real way to reverse this overall slowing of the domestic oil and gas business's growth would be for the price for WTI to break out of its current range and move up closer to $65 or $70/bbl. That will only happen if global demand increases back to the levels foreseen by the EIA, OPEC and the IEA back in January.

None of that can happen unless the U.S. and China reach a new trade agreement that reduces or eliminates existing tariffs and stimulates economic growth. Thus, everyone in the U.S. industry is hoping that the olive branch extended this week by China is a signal of a good-faith intent to get serious in the negotiations, and not just another head-fake by the Xi Jinping regime.

 

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David Blackmon is an independent energy analyst/consultant based in Mansfield, TX. David has enjoyed a 39-year career in the oil and gas industry, the last 23 years of w...