Can you believe it! The second half of 2020 is here and looking much brighter than the first half, I hope. To begin with, the jobs market came in, as of this writing, with the surprise addition of 2.5 million jobs —dropping the unemployment level to 13.5 percent.
Oil prices have begun to rise in response to the agreed reduction in production by Saudi Arabia and Russia. As of June 10, the price for WTI Crude Oil is $39.02 and Brent Crude Oil is at $41.94; natural gas is at $1.799.
Fitch Solutions increased its forecast for the price of Brent Crude Oil for the second half of 2020 to an average of more than $40 per barrel and see Brent rising in 2021 to approximately $49 per barrel.
“Compliance with OPEC+ production cut deal has outpaced our expectations, while demand appears to have passed its nadir,” as stated by the Fitch Solutions analysts in its June 1 report.
As producers in the United States and elsewhere continue to slash activity, they are helping to rebalance the market.
The industry probably has survived the worst of the price crash triggered by the COVID-19 lockdowns that destroyed demand. Marshall McCrea, chief commercial officer at Energy Transfer, said the company believes “things have bottomed out and are improving.”
Some drillers in the Permian Basin already are reopening wells that were shuttered in response to the price collapse. Eight percent of oil volumes from the Permian Basin that feed Energy Transfer’s pipeline network had been shut down; however, we have seen 25 percent of that volume turned back on.
Gasoline Demand Rebounds
Demand for gasoline is rebounding, suggesting that the car, at least for now, is making a comeback. Lockdown easing and states reopening are giving near-term relief to an oil market ravished by an unprecedented collapse in demand.
NiSource Inc.’s (Merrillville, Ind.) is eyeing $30 billion in gas and electric opportunities, according to Industrial Info Resources. According to John Egan at IIR, NiSource is contemplating as much as $30 billion in long-term infrastructure investment. Potential opportunities in the gas business total about $20 billion, with $10 billion in the electricity business.
NiSource owns gas and electric businesses in seven states, serving about 3.5 million gas customers and 500,000 electric customers. Gas utility units exist in Kentucky, Maryland, Ohio, Pennsylvania, Virginia and Indiana. IIR is tracking projects worth approximately $1.2 billion for the energy provider.
The U.S. Energy Information Administration is forecasting rising gas prices in the autumn, anticipating higher demand for heating and the revival of industrial activity. Goldman Sachs analyst Samantha Dart expects gas prices to jump to $3.50/MMBTU by winter 2020-2021 and reach $3.25/MMBTU by the summer of 2021. Bank of America agrees with Dart but pulls back, putting the rise to just $2.45/MMBTU in 2021.
The impact of rising prices on independent producers across Texas and the Midwest, who account for 90 percent of gas output, could prevent them from going bankrupt or from shutting wells.
The return to better natural gas pricing could incentivize exploration and production companies to reduce flaring and venting of gas and sell this higher-valued commodity to local buyers. The upcoming construction of takeaway pipelines will open access to the Gulf Coast liquid natural gas processing plants and gas-hungry Mexico.
‘Reshoring’ Manufacturing Capacity
Automotive manufacturing is one sector that will bounce back pretty quickly. Dealer lots are short of new vehicles for sale as the supply of those vehicles has not been moving from the manufacturers. Once these facilities come back online and the supply chain is back in operation, we will see an increase in this sector.
The automotive sector also will experience dramatic changes in its supply chain. Companies are seeking to “reshore” or bring back offshore manufacturing capacity. The impact of COVID-19 has shown that the industry cannot rely on offshore manufacturers for parts needed for production.
This pertains to the pipe, valve, fitting and flange sectors as well.
With this in mind, along with the COVID-19 disruption in the supply chain of offshore welding fittings and forged-steel flanges, we suggest you look to “reshore” with domestically manufactured material.
The scrutiny of imported, low-cost materials has increased due to the low quality of products and fraudulent practices used by offshore manufacturers seeking to gain a competitive advantage over domestic manufacturers.
Remember, the savings perceived at the procurement front end can be, and often are, offset by increased installation backend costs incurred due to out-of-tolerances, alignment issues and unreliable availability.
Warehousing, Data Center Projects
Distribution, warehousing and data center projects have seen a decrease in spending; however, a relatively small one. Data centers continue to play a significant role as numerous companies and educators turn to telecommuting to keep their employees connected as office buildings closed.
The growing demand for cloud computing and storage is expected to bolster the data center construction market. This increase in demand is being fueled by the changing workplace and same-day/next-day deliveries via e-commerce.
Warehouse and distribution center sectors have grown significantly over the past decade. They will continue this trend “as the world has moved to more of an online market place,” per IIR’s David Pickering.
With all the pairing of capex spending budgets due to the disruption of demand and the resultant impact on pricing, there still are sizable investments scheduled for the second half of this year and the first quarter of 2021.
As the states begin the process of opening and life returns to a degree of normality, the pent-up demand for goods and services will increase at a surprising rate. This resurgence could result in a strain on our supply chain, the labor markets and the ability to restart critical energy resources and manufacturing capacity.
PVF Roundtable News
The next scheduled networking meeting of the PVF Roundtable is August 11 at The Bell Tower on 34th, Houston, 713-868-2365. This meeting will begin at 4:15 p.m. CDT, ending at 7 p.m.
Due to the impact of the COVID-19 protocols, the PVF Roundtable board of directors highly recommends referring to the PVFRT’s website (www.pvf.org) for updates on networking meeting schedules and registration for the events.
The PVFRT’s board urges you and your associates to attend the networking meeting to exchange ideas regarding the emergence from the COVID-19 nationwide lockdown and the restructuring of our industry.