Upstream capital spending was predicted to make a bit of a comeback from 2019, but all bets are off for 2020 worldwide spending, with the United States likely to take the deepest plunge.

There is no doubt that capital expenditures (capex) across the energy complex are going to decline this year, as the Covid-19 pandemic has smothered demand for oil and gas. The annual spending survey by Raymond James & Associates Inc. issued on Monday, which captures public company data accounting for 65-70% of capex, makes clear that oil and gas will find no refuge this year.

The results for January through March begin in earnest this week for the exploration and production (E&P) sector, and “even more companies will downwardly revise previous capital spending guidance,” said the analyst team led by Pavel Molchanov. “While none of this is pleasant, it carries with it the seeds of an eventual oil market recovery: the cure for low oil prices is… low oil prices.”

The “ultra-bearish” oil price, obviously, reflects the unprecedented demand destruction brought about by the coronavirus, which has been only partially offset by the production cuts recently enacted by the Organization of the Petroleum Exporting Countries and its allies, aka OPEC-plus.

“The big picture,” said Molchanov, is that “global spending in 2019 was down 2%, and a much steeper 17% drop (in reality, even steeper) is on deck for 2020” across the worldwide complex.

The firm uses a bottom-up analysis of public company data, which offers a “reasonably close” outlook for international capex. However, the survey can be “way off” on U.S. E&P spend as it only accounts for around half of the industry, he said.

Private E&Ps in the United States, including those owned by private equity, as well as the U.S. operations of multinationals, are not included. Still, the widespread production shut-ins already underway would make it impossible to have an accurate top-down analysis.

“Even if oil were to recover to the $45-50 level by year-end, it is difficult to envision E&Ps outspending their already much-reduced budgets,” Molchanov said. “Quite the contrary: we think that most will end up underspending, with cash preservation being the overriding objective in these extraordinary times. Furthermore, additional dividend cuts are inevitable,” as several large E&Ps already have announced cutbacks.

Aggregate capex for Raymond James’ global 50-company survey peaked in 2013 at $599 billion, followed by three years of “brutal austerity,” with capex falling cumulatively by 54%, to $277 billion.

“The first green shoots of recovery came in 2017, with spending rising 6%…followed by a stronger 15% increase in 2018, but then a reversal to a 2% downtick in 2019,” Molchanov said.

In the good old days, i.e. January, prices began the year up 30% from early 2019, with West Texas Intermediate (WTI) predicted early on to average in the high $50s for the year. By February’s end, however, those prices were too far to see in the rearview mirror.

Last Monday (April 20), WTI fell off a cliff into negative territory. As the new week began, WTI front month had fallen by more than 26% and was trading at around $12.45/bbl.

The Cushing hub in Oklahoma already is near capacity, and E&Ps are shutting in production across the board.

Meanwhile, Reuters said Saudi Arabia was considering whether to reroute 40 million bbl in tankers destined to hit U.S. shores in the coming weeks. According to Reuters, Saudi Arabia Oil Co., aka Aramco, “said it is committed to its long-term contracts with customers with deliveries of crude shipments for April, May and June.”

How a surfeit of supply may impact decisions by the U.S. E&Ps should become clearer this week as E&P earning season kicks into high gear. Supermajors with large domestic operations led by BP plc, ExxonMobil and Chevron Corp. and Royal Dutch Shell plc are scheduled to report.

The biggest of the oilfield services operators — Schlumberger Ltd., Halliburton Co. and Baker Hughes Co. — already have told the tale, however, forecasting a big decline in capex by customers through at least mid-year and likely much longer.

[Want to see more earnings? See the full list of NGI’s 1Q2020 earnings season coverage.]

Based on the latest capex expectations foreshadowed by the E&Ps, still subject to what are likely more revisions, the Raymond James survey indicates capex will fall globally to $275 billion overall this year, bringing spending fractionally below the previous trough level in 2016.

“When adding the latest cuts to those from the 2014-2016 down cycle, 2020 spending equates to a cumulative drop of 54% from the peak level of 2013,” Molchanov said. “To clarify, this 54% drop comprises a combination of lower activity levels as well as lower industrywide costs.

“The relative proportions of these two variables naturally differ from region to region and from company to company. In 2020, however, the vast majority of the cuts reflect reduced activity.”

It may seem difficult to imagine when — and if — the industry will recover.

“While it will obviously take time for fundamentals to return to something approaching normality,” said Molchanov, “we remain convinced that global oil supply growth that can accommodate demand growth over the medium-term will ultimately require meaningful spending increases that can only occur with dramatically higher oil prices in the coming years.”