Bloomberg is reporting that more than 100,000 jobs have already been lost in the energy sector. Previously bustling energy hot spots like the U.S. shale plays, Scotland, Brazil and Australia and others have lost well over 100,000 jobs with no letup in sight.
According to Swift Worldwide Resources, a staffing firm with offices around the world, anxieties are rising. The company says the tens of thousands of workers that migrated to the energy sector when oil was $100 will now be out of work and have really no prospects of returning to work. With crude prices at $50 and the potential for another decline the major energy employers may not be hiring again for 12-18 months.
The energy sector is all too familiar with the feast and famine nature of the oil market. Oil prices are either soaring or crashing with major crashes about twice a decade. Back in 1998 when the active rig count fell from a high of 4,350 to only 488 entire generations of oil field workers left the sector. There was no work for years. The rigs were scrapped and when the business did pick up again the recovery was slow. Workers can't wait around the house for a couple years for prices to pick up again. Some of those workers had never done anything else. They were forced to learn a new trade and when the business began to recover they did not want to go back and face the same thing 4-5 years later.
Experienced oilfield workers make a lot of money. They have to be paid well to put up with the heat, cold, long hours, horrible outdoor working conditions and constant danger. A common worker with a couple years of experience can make $90-$100K a year. Once the family becomes used to living on that wage an oil crash that puts them out of work can be traumatic. In a normal job a downturn that causes a business to lay off workers does not impact the entire job market. In the oil business a downturn impacts all energy companies so workers laid off can't just move to another company.
About two years ago every other billboard around the Gulf of Mexico was advertising for workers for offshore rigs. Rigs were in high demand and day rates were soaring. Today there are no billboard ads and offshore rigs are being retired almost monthly. Noble announced the retirement of three more rigs just last week. There is a glut of new rigs coming to market at a time when oil prices are so low nobody wants to commit to a $600,000 per day rig rate to explore for oil. Offshore oil is expensive with costs per barrel of $75 or higher on some projects. It may be a long time before companies are interested in committing billions to explore for new deepwater reserves.
Because the business is cyclical some companies are not actually laying off workers but asking them to take a year of unpaid leave. That way they hope to get their experienced workers back when oil prices recover. What do you do for a year to make $100K to make up for your lost salary?
More than 100 major projects worth hundreds of millions of dollars each have been postponed or cancelled because of the oil crash. That means tens of thousands of workers, hundreds of rigs and thousands of service contracts scheduled to operate over the next five years were all eliminated by the stroke of a pen. Anticipated tax and royalty revenues evaporated.
In the North Sea where the weather is miserable year round more than 11,500 workers have been terminated according to DNB Markets. Menon Business Economics said another 30,000 jobs may disappear if prices don't rebound soon. Project this all around the world and the global economy is going to take a hit in 2015. However, the cheap fuel prices may ease some of the decline because business activity does pick up when fuel prices decline. Whether it will pick up enough to offset the decline in the energy sector remains to be seen.
Large companies are not immune to the problem. Apache (APA) announced plans last week to cut its active rigs from an average of 91 to an estimated 27 by the end of February. That is a major cut of -70% in their active rigs. Sandridge energy announced a similar move last week. Project this across the entire sector and the impact is going to be enormous.
On the positive side the CEO of Shell warned last week that the sudden decline in the energy sector could lead to demand outpacing supply as production declines in the next 2-3 years. The impact of long term projects being cancelled or postponed will cause significant declines in production in the years ahead. The world loses about 4.5 million barrels of production per day every year as a result of the decline in existing fields. If new oil is not continually discovered and produced to replace that decline then production can and will decrease dramatically. The chief of OPEC warned a couple weeks ago that cancelling large numbers of projects could lead to $200 oil in the years ahead because of that sharp decline in future production.
I have written about this before but it deserves to be mentioned again. We quote WTI prices, currently $53 as the price of oil. That is not the price of shale oil. On February 11th the price of Bakken crude traded between $36-$38. This is the price of shale oil. Everybody is measuring the profitability of shale production based on the WTI price but Bakken crude is consistently $10-$12 below WTI and sometimes even more. Shale producers have a lot slimmer profit margins than the analysts are giving them credit. This is why the active rig count is falling off a cliff.
Active drilling rigs declined -98 to 1,358 for the week ended on Friday. Oil rigs declined -84 for the week to 1,056. Active gas rigs fell -14 to 300 and a new 18 year low. Active rigs have now declined -573 since the high of 1,931 in September. That is a =29.7% drop.
Other than during the financial crisis the number of active rigs has been above 1,700 since the beginning of 2006. We are poised for a significant decline, possibly to the 1,100 level.
Baker Hughes warned that in those previous oil declines of 50% or more the active rig counts declined by 40% to 60%. So far we are only down -30% so we still have a ways to go. A 50% decline in oil rigs would be -805 from the 1,609 peak on October 10th. So far we have declined -553 oil rigs so we could lose another 300 before it is over.
Crude inventories rose another 4.9 million barrels to 417.9 million and the highest level for February since 1930. Crude inventories have risen +35 million barrels over just the last five weeks. Refinery utilization rose from 89.9% last week to 90%. Imports declined -100,000 bpd. U.S. production rose +49,000 barrels to 9.226 mbpd and the highest level since 1986.
Cushing inventories rose +1.2 million barrels to 42.6 million.
Gasoline inventories rose +2.0 million barrels to 242.6 million. Gasoline demand fell another -160,000 bpd and imports fell -210,000 bpd.
Distillate inventories declined -3.3 million barrels to 131.2 million. Demand rebounded +616,000 bpd after falling -883,000 bpd the prior week. This sounds like a paperwork problem rather than an actual change in demand. Imports decreased -144,000 bpd.
We should see another drop in distillate demand as a result of winter storm Neptune hitting the Northeast this weekend. With thousands of flights cancelled the demand for jet fuel will decline.
In the graphic below green represents a recent high and yellow a recent low.
Propane inventories declined by -2.28 million barrels to 64.96 million. Demand was flat at 1.59 mbpd. With the cold weather continuing this week we should see higher demand over the next several weeks as late winter refills continue.
Natural gas inventories declined -160 Bcf to 2,268 bcf. Inventories are now -0.5% below the five year average of 2,279 Bcf and +31.4% above year ago levels at 1,726 Bcf. With only 5 weeks left in winter there will be no gas shortage like we had in early 2014. With 2268 Bcf in storage and an average of -150 Bcf in weekly demand that will only deplete 750 Bcf unless a new ice age suddenly descends on the Northeast.
After inventories being low for the last year they are right in line with the five year average today.
The blue line in the chart below shows the current inventory relative to the five year average.
The market ended at new highs on Friday but in the case of the S&P it was only by a few points. The Nasdaq is in full breakout mode with a 90 point sprint above 4,800. The Greek tragedy playing out overseas could weigh on the markets this week because traders have already priced in a solution being reached. The economic calendar is very light with the exception of the FOMC minutes on Wednesday and the Philly Fed Survey on Thursday. Wait for confirmation of the breakout with a gain of additional points before launching new long position.
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