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QuickHit: There’s no going back for O&G sector jobs

In this week’s QuickHit episode, we have Vandana Hari, CEO and founder of Vanda Insights. She has 25 years of experience in the oil and gas and we asked what she expects to see happening in the near future. Will the oil industry recover, and when? Will bankruptcies and layoffs in big oil firms continue? And what can these companies and the government do to prevent the worst from happening?

 

We also discussed the oil and gas industry in the previous QuickHit episode on what companies can do right now to win post-COVID.

 

The views and opinions expressed in this QuickHit episode are those of the guests and do not necessarily reflect the official policy or position of Complete Intelligence. Any content provided by our guests are of their opinion and are not intended to malign any political party, religion, ethnic group, club, organization, company, individual or anyone or anything.

 

Show Notes

 

TN: Today we’re joined by Vandana Hari of Vanda Insights. She is one of the top energy market experts in the world. Can you tell us a little bit about your firm and what you do?

 

VH: I have been looking at the oil markets for 25 years now. I started my firm Vanda Insights, which provides global oil markets macro analysis about 4 years ago. Prior to that, I worked with Platts, which is a very well-known name in energy commodities. I looked at the pricing of crude, refined products and various other energy commodities. I covered news and analysis.

 

TN: Great. So it’s obvious why you’re here. Crude markets are in crisis. The big, big question is how long are we in this kind of sub $20, sub $30 zone? Generally, what’s your expectation for the length of that super depressed pricing?

 

VH: It’s certainly not going to be a v-shaped recovery. As we speak Brent, a benchmark crude, is trading around $22 to $23 a barrel. US WTI, another benchmark, is trading around $12 or $13 dollars a barrel. Now where do I see these going?

 

As we look out into May, and I’m taking into consideration a couple of factors there. One is that we are starting to see gradual reopening of the economy in Europe, the worst-hit countries Italy, Spain, France, Germany, and then we have the US and as we were discussing offline, Texas is looking to reopen. Some of the other US states are going to reopen as well. The oil markets will have a very close eye on these re-openings because they have the answer to demand revival. We are coming out of an unforeseen, unprecedented trough in global oil demand close to 30%–30 million barrels per day–of global oil demand has been destroyed. How does this go into May?

 

I’m expecting a very extremely slow gradual revival. There may be a bit of an impetus and upward boost to oil prices from a gradual reopening. Nothing like what we are seeing in the stock markets, though. I think that’s where stocks and stock markets and oil are going to decouple and have already started to decouple from what I can see.

 

The other element is going to be supply. So OPEC and non-OPEC alliance of 23 members. 20 out of those 23 have committed to reducing production collectively by about 9.7 million barrels per day for May and June. Now typically, that sort of an announcement, which happened back on the 12th of April would have in itself boosted oil prices. But this one didn’t. Now clearly it is seen as too little too late. Nonetheless, it will start mopping up some surplus. It’s just that it will again be very slow in giving any sort of positive signals to oil because remember, oil has to work through nearly three months of oversupply and an overhang. So the glut is going to take its time to disappear.

 

TN: It’s a demand problem, right? It’s a supply problem, but you do have lack of demand from the government shutdowns, and then there is supply continuing to come online. All of this issue, it makes me wonder bout the shale companies. I’m curious about shale and kind of privately held independent oil companies. But I also want to learn a little bit about NOCs, the national oil companies. If you don’t mind telling us, what is your view on shale? And how do you expect the NOC’s to fare after this? Do you think they’ll thrive? Do you think they’ll cut the fat? Do you think they’ll change at all, or do you think they’ll just continue to lumber along as they have for the past whatever 70 years?

 

VH: The one characteristic of this crisis is that the pain in the oil sector is being felt and will continue to be felt across the spectrum, all the way, from oil production to refining to logistics. And we can talk about logistics in a little bit as well, because that’s doing quite well now because of storage demand.

 

However, the pain is going to be felt all the way down to refining and retail. It’s also going to be spread across geographies. It’s going to be spread across the size and nature of companies, whether you are an oil major or an independent or an NOC.

 

Let’s talk about shale first. It’s not just the OPEC, non-OPEC enforced mandated cuts, but I am expecting to see major decline starting to happen in North America, in Brazil and perhaps in other places like the North Sea as well. What happens in the US is going to be key because it’s the biggest oil producer, thanks to the shale boom. Shale contributes nearly 80% of US oil production. What happens to shale is also going to hold the key to US energy independence in the future.

 

I also look at a couple of very key metrics in the shale patch. One is the weekly rig count that I monitor from Baker Hughes. The other one is a weekly count of the fracturing fleet. So in the hydraulic fracturing, it is far more jaw-dropping decline in numbers that have seen. 70% drop in the frat fleets currently versus the start of this year.

 

What all of that tells me, and we’ve done some number crunching of our own, is we expect to see close to a million barrels per day of decline in June going up to 2 million barrels per day in July. That’s something that the oil market is not quite factoring in yet. Let’s remember that shale bounced back phenomenally after the 2014-16 downturn. That’s the impression that the market has. That shale may be down on its knees, but it will bounce back. But this time, I think it’s going to be very, very different. It’s going to be nothing like a bounce back.

 

As far as national oil companies are concerned, I look at them quite closely sitting here in Asia, they are a breed in themselves. A lot of them are lumbering giants, very slow to change. Most of them are directly controlled by the government or have majority state ownership.

 

Now, one of the things that I have noticed that is going in favor of the NOC’s, especially in Asia–countries like India, China, even places in Southeast Asia–is that they have a captive, domestic, fast-growing market. These NOCs also tend to be vertically integrated, so and more often than not, Asia is a net importer of crude. They have giant refining operations and relatively less upstream or oil and gas production operations.

 

Refining is also getting hit in the current downturn. What we see refiners doing, which includes these NOCs of course, are they’re cutting back out. Port refining margins are terrible. They have gone into negative for a lot of the major products. How will the NOCs survive this? I think they come out of this with a great deal of financial strain. We have to see to what extent they get government support. Some of the NOCs, unfortunately, especially in countries like Indonesia, also struggle with fuel subsidies. So those might fare even worse in the recovery mode. Overall, I think another transition that’s going to take hold for NOCs is the investment in technology: to be more efficient whether you’re producing or refining or retailing oil. And to be more environmentally-friendly with products.

 

TN: Do you think they’ll be more productive? Do you think they’ll invest in technology? Just across the board with oil and gas companies in general. Do you think they’ll actually invest in productivity or do you think they’ll just kind of hold their breath and buckle down like they have always done? Can they afford to do that this time?

 

VH: So when it comes to technology, specifically for cleaner energy, it tends to be driven more by regulation than by market forces or by just companies one day waking up and deciding “Hey, I’m going to be more environmentally friendly.” It just doesn’t happen that way, and that’s certainly true for NOCs. I think oil majors are under a slightly different kind of dynamic. We’ve seen, for instance, only in recent weeks, BP and Shell double-down on their commitment towards greener, cleaner energy. Of course, their feet are being held to the fire by their shareholders.

 

NOCs are in a very different environment. I think a lot will depend on to what extent governments in Asia re-commit themselves to the Paris Agreement, and are part of the global drive towards cleaner energy. We have seen in recent years visible, tangible air pollution has been a major concern in cities all the way from Delhi to Beijing.

 

TN: As we as we stop under COVID, you know, air quality has improved dramatically, right?

 

VH: Yes indeed. You have to think when people go back to the new normal, and they are out and about and the pollution levels increase, what will that do in terms of pressure on these companies? So overall, I think the pressure from the environment will remain, to adopt new technologies, to move towards cleaner fuels.

 

Pressure from oil prices to be more efficient may be the case for NOCs. I see that a little bit less, and they’ll have to just pick and choose basically, right? But your big question, where does the money come from? I think that remains a major, major issue. Will they be able to raise money? So we’ve seen in the latest crisis, a few oil companies that are well-regarded, oil majors have tapped banks and raised loans. What I would personally love to see is for these NOCs to come out there a little more aggressively, because after all, they will be back in favor, thanks to the captive market. So I’d love to see them raise money with bonds, bank loans, or whatever, because they will need money from outside. There certainly won’t be enough to dip into their pockets.

 

TN: Yeah. The national accounts from any of these countries can’t really handle it. So that’s a great point.

 

We’re running long, but I don’t want to stop this conversation. So normally, I’d cut this off. But let me ask you one last question, okay? I live in Houston, Texas, and oil and gas town. We’ve seen some layoffs. But we actually haven’t seen a lot yet. You don’t live here so, you know, you can give us an unbiased view of the energy sector. What do you expect, and it’s not just Houston, of course, it’s the energy sector globally. Are we at the midpoint of energy layoffs, are we early, are we late? I mean, how bad do you expect it to get?

 

VH: I think we are probably at the beginning of it. So we have started seeing bankruptcies in the shale sector. Well, to be clear, the bankruptcies in the shale sector accelerated even in 2019. Shareholders and lenders have been becoming disenchanted with the sector for a while. But I do expect bankruptcies to set a record unfortunately in 2020, perhaps spilling over into 2021 as well.

 

But when I look at the US energy sector, I’m also paying attention to a lot of news about the US government making a lot of noise about wanting to help the energy sector. So whether it be, opening up the Strategic Petroleum Reserve, allowing producers to store oil there or to giving them loans from the Fed’s Main Street Lending program. All of that, remains to be seen, and we’ve heard some ideas about banning or putting tariffs on OPEC crude and so on, which probably won’t happen. But I think some of these other measures will happen.

 

My concern is that for most companies, it will probably be too little too late. So I do expect a huge consolidation, and unfortunately a lot of layoffs. People will just have to reinvent themselves, learn new skills, because there may be no going back to oil sector jobs.

 

TN: I think you’re right. I think it’s a generational change. I think it’s a really tough time, and you know these people, it’s nothing they deserve, it’s nothing they’ve even done. But it’s just a very tough global situation where supply outweighs demand. It’s that simple.

 

So Vandana, this has been amazing. I haven’t done any of these interviews that are this long. I’m so grateful to get this much of your time. Thanks you and I’m hoping maybe we can revisit with you in a few months see where things are and take stock of what the future holds?

 

VH: It’s been my pleasure, Tony and I’d love to do this again and thank you to our viewers who’ve stayed with us all the way to the end. I hope it has been worth it.

Categories
Podcasts

In America, the economy sinks but markets surge. What gives?

 

BFM 89.9: The Business Station speaks with CEO and founder of Complete Intelligence, Tony Nash, to explain why the markets have surged and earnings seem resilient despite the US GDP falling to negative 4.8 percent.

 

Produced by: Michael Gong

Presented by: Noelle Lim, Khoo Hsu Chuang

 

Listen to the podcast, originally published in BFM 89.9.

 

 

Podcast Notes

 

BFM: We are talking to Tony Nash, the chief executive of Complete Intelligence on the American markets. Tony, thank you for talking to us. American GDP shrank by 4.8% overnight, the steepest fall since the last recession. What did you think of these numbers in terms of what you expected prior?

 

TN: It was a bit worse than many people thought. But it wasn’t as bad as it could have been. That was the thought that many people had, and markets tend to be looking forward. So looking at Q2, we now have big states like Texas and Florida and others that have started to open up fairly aggressively. So markets themselves are looking forward. And markets are looking pretty favorably on some of the opening up lines.

 

BFM: Fed Chair Jerome Powell is calling for more action from the government. What are the options and what do you hope to see?

 

TN: Well, there are options for more fiscal stimulus. The federal government could do things like an infrastructure plan. Two years ago, in his State of the Union address, the President talked about a $1.5 trillion infrastructure plan for the U.S. They could do something like that. The individual states, which really imposed a lot of these restrictions, they really haven’t had to pay up much aside from kind of the standard unemployment benefits.

 

So the states could pony up a bit more cash than they have. They’ve really been relying on the federal government to pay for this whole thing. And they haven’t really had any accountability for the decisions that they’ve made. So I think the states really need to pay up a bit in terms of fiscal stimulus.

 

BFM: The Fed has backstopped the corporate bond market in the fixed income market for some time. Obviously, you can see that exemplified in the six and a bit trillion dollars of debt on the balance sheet. Do you think they’ll come a time when the Fed backstops the equity market as well?

 

TN: I don’t know. There’s been talk about that, they’ve certainly done that in Japan and the BOJ owns a lot of the ETFs in Japan. I don’t necessarily see that happening in the U.S. because it’s a door that once you open, it’s very, very difficult to close.

 

It’s the same question with negative interest rates. And so these are activities that once you start, they tend to be very, very hard to stop. And most of the market observers don’t really want that to happen.

 

 

BFM: Q1 GDP came in minus 4.8 percent. But the consensus estimate of economist on Bloomberg reckoned there’s going to be a minus 26 percent drop in Q2. And even more astonishingly, I think a nine percent improvement in Q3. Do those two numbers strike you as a little bit extreme?

 

TN: Q2 seems a little underestimated, meaning I don’t necessarily think it’s going to be that bad. Q3? It’s possible it could be nine percent. I think given how negative it could be in Q2, you could definitely see a rebound like that. But that’s just a base effect in terms of the quarter on quarter growth. It’s not necessarily a dramatic year on year growth. In fact, year on year, that’s actually negative and a negative print. One would hope that if Q1 and Q2 are so bad that you would see a print that’s at least nine percent in Q3.

 

 

BFM: Yet markets charge ahead despite relatively bad macro data. What is this optimism based on?

 

TN: Seeing the states open, seeing some realistic plans being put together to do this, there’s a balance of doing it aggressively and carefully. I know that sounds a little silly, but we’re seeing some real push by Americans to want to open. So the state governments are going to probably do things a little more aggressively than they initially wanted.

 

There was some concern that Q1 earnings would be worse than they are. Meaning that companies may try to pack all their negative news into Q1 in hopes that Q2 will look slightly better. But sure, they’ve packed some of the negative news in Q1. But some of the Q1 earnings haven’t been as bad as people had feared. So markets are looking forward. And in the U.S., it’s a flight to safety.

 

We’re also seeing on a relative basis, U.S. markets perform fairly well as, say, non-dollar assets or overseas dollar assets come into the US.

 

 

BFM: Microsoft, Facebook, and Tesla all came out last night all the better than expected. Microsoft showing some picture of health in the corporate sector. Tesla, obviously, where car sales are concerned, then Facebook where the ad consumer market is concerned. Can we read this optimism into Q2 and possibly even into Q3?

 

TN: I think certainly Facebook and Microsoft, with people sitting at home, those two will probably do quite well in Q2. Tesla? I wouldn’t expect Tesla to do well in Q2. Auto sales have been way down in Q2. And with oil and gas prices as low as they are, the substitutionality effect of electronics from internal combustion engine cars, the incentive is not as high as it once was. So I don’t necessarily see Tesla’s performance to be better than expected. But then again, Tesla bulls are Tesla bulls. They’ll buy, and they’ll pump up the price regardless of how they perform in real life.

 

BFM: So you don’t expect this to be a broader momentum for the broader market?

 

TN: Anything focused on productivity, anything focused on virtual activity, will do very, very well. But things like car sales, again, they’ve been really difficult. Anything around entertainment or group, physical, in-person, entertainment, obviously, it’s just not possible or hasn’t been possible for those to grow. So those are going to be really, really hard for people to get optimistic about.

 

On the other hand, you’ve seen, energy firms actually performing really well today. The major oil and gas firms and U.S. markets performed really well. Part of that is on the back of gossip that the U.S. Treasury may come to the rescue with some preferential financing for American oil and gas firms. Whether or not that’s going to happen, we don’t really know yet. But that may come to pass, which may help some of these firms.

 

BFM: Talking about the oil industry, are there any structural changes they can make to improve their prospects of survival? Some of these oil majors that you spoke of?

 

TN: Oil and gas firms are incredibly inefficient. There are a lot of productivity changes the oil and gas firms could make, whether they’re NOCs, the national oil companies, or the private sector majors. Oil and gas workers tend to make a lot more than other sectors.

 

They tend to be more bloated, so there are a lot of productivity measures that can be taken. For NOCs, for the national oil companies, there can be more activities taken to make them more accountable than markets. And so I think in Malaysia, you’re lucky. Petronas performs pretty well.

 

But other NOCs don’t perform as well and you can see some major changes in terms of fiscal accountability. Assuming oil prices stay lower, accountability to the central governments and performance rather than the subsidies coming from central governments, as we’ve seen in the past, may come to pass in some countries if they can’t really afford to continue to subsidize these governments. Because, you know, we’re seeing the emerging market and middle-income country currencies come under a lot of pressure versus the U.S. dollar. If you’re seeing energy revenues decline and you’re seeing pressure on the currency, it’s really hard for some of these governments to subsidize their national oil companies.