Most Alaskans spent a lot more time at home in April than they usually would. Many businesses were closed and a significant share of the labor force worked from home. The Coronavirus Pandemic generally trended downward during the month of April, ultimately leading to some restrictions getting lifted by the end of the month. Here are some of the highlights and what it means to our state’s economy.
Oil Prices Went Negative
April 20th was a historic day in the oil world. WTI prices turned negative for the first time in history. Alaska North Slope (ANS) crude received an assessment for the day of -$2.36. In reality, it’s unlikely that any actual barrels got exchanged at negative prices. It was just a paper transaction anomaly in the futures market in which a small number of traders got stuck holding a contract they couldn’t manage. Those traders ended up paying someone to let them off the hook.
This situation could repeat itself as the June delivery contracts expire on May 20th. However, traders are probably going to try to clear their positions earlier in the month after getting burned. It’s starting to look like April was the low point in this cycle.
OPEC+ production cuts take effect on May 1st and several producers around the world have already curtailed production based on the economics. Meanwhile, oil demand is starting to pick up and storage fears are beginning to wane. In theory, oil prices should start to stabilize in May, although its unlikely ANS will reach much above the $20 range. Of course, things are complicated and anything can happen.
The ANS price for the month of April ended up averaging $16.55, including the one day below zero. That brings the fiscal-year-to-date average to $55.42 (July 2019 through April 2020). Given where things stand today, the FY20 average price is looking like it will end up at $49.19 +/- $0.37.
Looking forward to FY21 (which starts in July), it’s still likely that the current oversupply will depress prices through next year. From what we can see today, the average price next year is probably going to land between $24.35 and $44.26.
There are limited opportunities for upward surprises (seeing as high inventory mutes shocks). Although, it is possible that timing issues could result in upward pressure from logistical challenges at some point next year. There are already signs that supply cuts may be difficult to reverse and that bankruptcy and consolidations they we already predicted for this year are accelerating. US rig counts are down 48% in the last two months and production declines are already underway. If demand recovers quickly, things could get out of balance in the other direction pretty quick.
But, until there is clarity around when US demand will recover, the average of expected outcome for FY21 results in a forecast price of $33.07. I expect that number to increase as more data comes in (unless the situation gets worse instead of better). But for now, that’s the baseline.
Production is Down
Although the North Slope continues to operate, the pandemic has resulted in some impacts on our production level. April production appears to have averaged 503,603 barrels of oil per day (BOPD), which is nearly 20,000 BOPD below expectations for the month. Part of that is from navigating the challenge of moving personnel on and off the North Slope right now.
In May, the Trans-Alaska Pipeline System will limit the flow of oil by about 50,000 BOPD to manage storage and sailing schedules for the month. But, that issue should be short-term. TAPS typically sees a decrease in flow every summer, normally starting in May. However, we wouldn’t usually see a 50,000 decrease in throughput until at least July. So, this is slightly lower production than expected.
Looking at June, no proration will be required because companies are voluntarily curtailing production upstream. ConocoPhillips announced they would reduce production by about 100,000 BOPD for the month of June. That should give the system plenty of room to breath.
With everything we know today, it looks like FY20 production is heading toward an average of 487,933 BOPD, of which 475,656 BOPD will have flowed down TAPS.
July and August were already expected to see reduced throughput for annual maintenance. So, it’s unlikely that more prorations or curtailments are needed. If those scheduled repairs can get done in May and June, we might even end up seeing higher than planned production this summer.
However, ConocoPhillips had previously said they were going to stop drilling for a few months. And, we’ve already heard that capital budgets for all production companies have shrunk. That means that our FY21 production outlook needs to be downgraded. With what we know right now, it’s looking like production for the next fiscal year will wind up at 477,905 +/- 20,000 BOPD.
The Permanent Fund Recovered a Bit
The financial reports for March 2020 show a total loss of $5 billion. Our stock holdings were down $3.9 billion on the month (we previously estimated they were $4 billion).
But, we did see a nice recovery in April. It now looks like the fund is down a total of about $2 billion on the year. If things don’t get crazy, we should get another $1 billion back before the year is up for a total annual return of -1.5%.
Add that $1 billion loss to the $2.7 billion transfer to the general fund, and it’s looking like the total net fund balance will end up at around $62.6 billion at the end of the year (around $3.7 billion below where the year started).
If it matters to you, the losses to the fund are almost all covered by unrealized gains. So, the ERA balance didn’t take a hit in all of this. Statutory net income for FY20 is currently +$2.6 billion through March.
Jobs Numbers are Lagging
The March 2020 unemployment numbers are available. They show that Alaska’s economy was on solid ground before the pandemic hit. Our seasonally adjusted unemployment rate hit a new record low of 5.6% and the count of unemployed people fell to 19,426 (the lowest count since August of 1990). Of course, those numbers were collected in the second week on March – before everything shut down.
The Governor ordered businesses to close on March 17th, and then told everyone to stay home starting March 28th. Protecting public health did significant damage to our economic health. More than 32,000 people filed for unemployment in March. That’s a 637% increase over last March. It’s expected that number got bigger in April when some additional provisions kicked in.
When the April data comes out in three weeks, it will show how bad things really are. And May numbers will be worse. Oil companies are already laying people off and the summer tourism sector is non-existent. Right as the economy would usually be picking up, the jobs won’t be there. So, it’s looking very possible that we go from record low to record high unemployment in the span of a couple months.
State Revenue Picture Didn’t Change Much
With lower prices and lower production levels, it’s pretty certain that oil revenues are going to be less than expected in FY21. The legislature built the budget based on a Department of Revenue forecast of $717 million of oil money. Our model is suggesting that there’s a 72% chance we will get less than that. But, the average outcome for FY21 is $632 million – with 90% of simulations falling between $410 and $952 million. So, even with the calamity and carnage we see today, it’s actually not much worse than we already planned for.