The oil price collapse is a bad omen for much worse things to follow. The global contagion is impacting the U.S. economy and the domestic oil industry far greater than I realized just two weeks ago. As I try to allow my analysis to “Catch Up” to the gravity of the situation, my new forecast of the U.S. economy and oil industry is quite dire indeed.
I don’t say this to panic anyone, but to provide a more “realistic and pragmatic” view of where we go from here over the next few weeks and months. The rapid collapse in the U.S. oil price suggests BIG TROUBLE ahead for the domestic shale oil industry. While the low oil price is causing havoc in the shale industry, it’s only one component of the overall equation.
Today, oil consumption in the United States has already declined significantly due to the lockdown of many cities and areas in the country. However, this is just the first stage of the crisis. My gut tells me that U.S. oil consumption is likely down 25-30% already… maybe more. But, as state and federal governments continue to lockdown additional cities, we may see upwards of 40-50% drop-off in oil consumption. It sounds outlandish, but we have to start considering the FACTS.
Here is the U.S. oil price collapse over the past five weeks:
During the week of February 18th, the oil price closed at $53.38. Four weeks later, the price fell 58% to $22.63… as of the close Friday. Analysts, investors, and the public don’t seem to understand just how much oil demand destruction is taking place. According to the EIA, U.S. Energy Information Agency, the United States consumed 21.5 million barrels per day (mbd) of oil products as of March 13th. Now, we don’t consume all of that amount domestically, some supply is exported.
From the EIA’s recent update, the U.S. oil refining industry supplied 16.1 mbd of gasoline, jet fuel, and diesel… but 2.2 mbd were exported. Thus, my back of the napkin calculation suggests that U.S. domestic consumption of these three petroleum products was about 14 million mbd. If we assume 25-30% of gasoline, jet fuel, and diesel consumption is already cutback, that’s already a loss of about 4 mbd, or it will be shortly.
We have to keep an eye on the U.S. petroleum stocks over the next few weeks and month, but at some point, domestic demand destruction will eventually force the oil industry to cut back on production because… THERE WILL BE NO PLACE FOR THE OIL TO GO!!
I don’t believe most analysts realize just how quickly U.S. oil production will decline, NOT DUE TO THE LOW PRICE, but because the market won’t need it. This is by far the MOST DAMAGING factor for the U.S. Shale Oil Industry. Back in early 2016, when the oil price fell briefly to the $20s, the U.S. Shale Oil Industry cut back on CAPEX and new wells. However, as the oil price recovered, shale companies started to increase CAPEX spending, additional wells, and production. This time around will be much different because the present DECLINE is not due to the low oil price, but the MASSIVE DESTRUCTION in demand.
The next chart shows how quickly U.S. Shale oil production can decline if no new wells are added:
U.S. shale oil production at the end of 2018, not including 2019’s production, fell from 7.3 mbd to 3.9 mbd in just ELEVEN MONTHS!! LOL. That is the natural decline rate of U.S. shale oil. Thus, if the industry added NO NEW WELLS in 2019, the shale oil industry would have lost 3.4 mbd.
The next chart is my estimate of where U.S. shale oil production could fall by the end of Q2 2020:
I believe U.S. shale oil production could likely collapse 2-3+ mbd by the end of Q2 2020 (June 30th). Again, there just won’t be any place for all this oil supply to go if the United States continues to lockdown or even declare martial law. Already, the airlines have cut back flights at least 30-40%, and that will increase during Q2 2020. I see the biggest declines in Gasoline and Jet Fuel consumption. Because we still need to move food, goods, and products around, truck traffic will remain pretty robust even though we are going to see a decline in overall semi-tractor truck traffic.
I can tell that U.S. domestic gasoline consumption is down drastically because the wholesale RBOB price closed at 61 cents today (Friday). Less than a month ago, wholesale gasoline was trading at $1.72. If we add federal and state taxes along with the gas station profit, we are going to see $1.20-$1.30 a gallon in most cities shortly. One of my followers sent me a Facebook image of 99 cents in Kentucky… ALREADY!!
Honestly, the speed to which the entire Global Economy and Financial System collapsed has taken me by surprise. But, all we can do is try to react to what is taking place and prepare accordingly. I now see the U.S. oil price falling to the low $10s… MAYBE EVEN LOWER to the SINGLE DIGITS. Why? Because the massive demand destruction will continue to gut the oil spot price until the industry curtails production.
Even though President Trump announced that the U.S. Government would start buying oil to fill the SPR – Strategic Petroleum Reserve, there are only approximately 70 million barrels of storage remaining. If domestic consumption continues to fall by 5+ mbd, that would only take 12 days of buying to fill the SPR. So, if you start doing some simple math… WE ARE IN SERIOUS TROUBLE, and I believe the market still hasn’t caught on yet.
Unfortunately, even if this virus spread peaks and declines in the next 2-3 months, the ECONOMIC & FINANCIAL DAMAGE will already have been done. We don’t come back from this one.
I will be discussing future scenarios and precious metals updates here and on my SRSrocco Report Youtube Channel. I plan to do a precious metals video update this weekend.
GOOD LUCK, EVERYONE.