By John Persinos
I speak for many others when I say that never again will I hop on an airplane to travel great distances simply to watch people in suits in a hotel ballroom flip through PowerPoints. During the pandemic, these kinds of social rituals are being supplanted by remote teleconferencing applications. When the coronavirus is gone, there will be little appetite to return to the status quo.
That's bad news for energy demand, but good news for the money-making opportunity that I highlight below.
It's not just the economic downturn that's hurting energy consumption. The social distancing strictures of the pandemic are changing business and personal habits, forever. People are spending more time at home using remote technologies and far less time in trains, planes and automobiles. This shift will become permanent. History teaches us that it often takes a disaster, such as a war or plague, to accelerate changes that already had been gestating.
Coal was undergoing inexorable decline even before the pandemic. Recent government projections show that the U.S. is on track to produce more electricity this year from renewable power than from coal for the first time ever.
A decade ago, coal provided nearly half the nation's electricity. Coal demand is mostly for electricity generation, but it's being destroyed by cleaner natural gas and will be further destroyed by cheap solar and wind. The oil and gas industry is undergoing upheaval as well.
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In a minute, I'll steer you toward an investment play in a technology that will gain from declining fossil fuel consumption. But first, let's focus on the precarious state of Big Oil.
The glut eases…
To be sure, crude oil prices are rebounding, in the wake of two new reports showing the oil glut is diminishing. The question is whether the oil price rally can last.
The American Petroleum Institute (API) on Tuesday estimated a U.S. inventory draw of 8.322 million barrels. A day later on Wednesday, the U.S. Energy Information Administration (EIA) reported that U.S. crude stockpiles had shed 7.5 million barrels for the week ending July 10, after a build of 5.7 million barrels reported for the previous week. The consensus of analysts was for the EIA to report a much smaller crude oil inventory draw of 2.275 million barrels.
Oil prices have risen in response to the inventory reports from API and EIA. West Texas Intermediate, the U.S. benchmark, settled Wednesday at $41.20 per barrel. Brent North Sea crude, on which international oils are priced, settled at $43.79/bbl. Crude has staged a steady recovery since May (see chart).
However, despite the inventory draw, total U.S. crude oil stockpiles are about 17% above the five-year average for the season. The crude price rebound could be short-lived.
OPEC+ (that's OPEC plus non-cartel partners such as Russia) met Wednesday to discuss plans to begin pulling back in August from production restrictions.
As the global economy fitfully recovers from the COVID-19 pandemic, energy consumption is climbing. Accordingly, OPEC+ signaled yesterday that it will allow production cuts to fall from 9.7 million barrels per day (mb/d) to 7.7 mb/d beginning next month. The move could trigger another oil price slump, but oil producing nations are desperate for revenue.
Major oil producing nations have lost a lot of money because of the pandemic. According to a report released Monday by the International Monetary Fund, oil producers in the Middle East are on track to earn $270 billion less in oil revenues this year compared to 2019, with Saudi Arabia losing the most. As its national coffers shrink, the House of Saud fears political instability.
The U.S. shale patch has been particularly damaged by the pandemic-caused plunge in oil demand. A report last week by energy law firm Haynes and Boone asserted that the wave of oil and gas bankruptcies in North America will continue for the rest of 2020. Many shale producers are saddled with junk-rated debt that's difficult to service amid low oil prices and inventory oversupply.
The old guard's survivors...
That said, the Hydrocarbon Age won't disappear overnight. The strongest energy producers should survive over the long haul. For example, "supermajors" such as Royal Dutch Shell (NYSE: RDS.A) and Chevron (NYSE: CVX) possess seasoned management, integrated operations, and diversified assets. These behemoths also have the financial wherewithal to invest in renewables and they're already making the transition to a low-carbon future. However, many of their peers won't be so fortunate.
Ruthless consolidation among oil and gas producers seems inevitable. When prices are low, merging helps struggling oil companies stay afloat by slashing costs and scaling up.
Meanwhile, the midstream sector is in turmoil. Pipeline projects in the shale patch recently suffered debilitating legal blows that bode poorly for the entire midstream industry. Dominion Energy (NYSE: D) and Duke Energy (NYSE: DUK) on July 5 announced that they had canceled their joint project the Atlantic Coast Pipeline, given legal uncertainties and persistent environmental protests. The pipeline would have transported gas from the Utica and Marcellus gas fields in West Virginia to North Carolina.
The next project to get shuttered was the Dakota Access Pipeline, which already was in service under the auspices of Energy Transfer (NYSE: ET). A federal judge on July 6 ordered the pipeline must be emptied and shut by August 5, for the completion of deferred environmental impact studies.
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The news about the two pipelines underscores the legal and regulatory risks that continually bedevil energy investors.
Despite modestly rising oil prices, I don't expect a sustained recovery for the energy sector this year. A Rystad Energy analysis released July 15 shows the number of drilled wells globally is projected to reach around 55,350 in 2020, the lowest since at least the beginning of the century. The decline represents a dizzying 23% fall from 71,946 wells in 2019 (see chart).
The pandemic is hastening the adoption of "green" energies at the expense of fossil fuels. COVID-19 has pushed the energy sector toward an inflection point whereby oil and gas are increasingly replaced by renewable energies, such as solar and wind power.
Technology, the new king...
Another technology positioned to take off in the post-COVID world is 5G wireless, which confers considerably greater bandwidth and download speeds than 4G.
The advantages of 5G are central to the remote, mobile and virtual technologies that consumers and businesses are embracing during the pandemic. These advantages will experience even greater demand once the pandemic is over.
Read This Story: Seize This Once-in-a-Lifetime Opportunity
5G is a "disruptor," similar in scope to the combustion engine, the light bulb, the personal computer, the Internet, and the smart phone. However, there's a technological flaw to 5G that the telecom industry must overcome.
After painstaking research, our investment experts have uncovered the one company that can fix this flaw. And yet, Wall Street analysts are ignoring this small-cap innovator. The time to invest in this company is now, before the rest of the herd catches on and bids up its share price. Click here for our 5G report.
John Persinos is the editorial director of Investing Daily. Send your questions and comments to mailbag@investingdaily.com
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