Page 8 - MEOG Week 13

MEOG FInanCe & InVestment MEOG
Oil prices take another tumble
markets
OIL prices plunged again on March 30, with global benchmarks Brent and West Texas Inter- mediate (WTI) hitting their lowest levels in almost two decades.
Brent had fallen 12.2% to trade as of 16:30 GMT on March 30 to $21.89 per barrel, a level not seen since 2002. Meanwhile WTI had dropped 7.3% to $19.93 per barrel, after hitting $19.85 earlier in the trading session – also an 18-year low.
Efforts to slow down the spread of the coro- navirus (COVID-19) spread have caused fuel demand to evaporate, with experts predicting that global oil consumption could slump by as much as 20mn barrels per day (bpd) in April, as lockdowns come fully into force.
At the same time, three years of production cuts by Russia, Saudi Arabia and other OPEC+ producers were due to expire on April 1, after which point they will be able to produce as much as they please. Hopes that a supply war could be averted were dashed on March 27, when Saudi officials said no talks were underway with Moscow.
Meanwhile in the Russian capital, officials have indicated that a new OPEC+ supply pact would only be possible if other countries joined the group.
Even if the group was enlarged, the main factor that has undermined OPEC+ efforts to rebalance the market since 2017 has been rising US shale oil production. It is very unlikely that the US would ever consider enforcing a cap on its output. And such a move likely could not be implemented anyway, given that the country’s shale industry consists of hundreds of individ- ual operators.
This said, Washington is considering
intervening in the supply war. This could poten- tially involve using diplomacy with Saudi Arabia and the threat of sanctions with Russia to force both countries to cut their production.
Norwegian consultancy Rystad Energy esti- mated on March 30 that efforts to combat the coronavirus would cause a loss of 16mn bpd to global oil demand.
S&P Global Platts Analytics predicted the same, along with a year-on-year drop of 4.5mn bpd in 2020 as a whole. The world’s oil consump- tion averaged 100.5mn bpd in 2019.
Others are forecasting an even sharper drop.
“Cars not on the road, airplanes not in the air, factories not working, people not going to work. We see, in this month of April that’s com- ing, what could be a 20mn bpd decline in oil demand,” IHS Markit’s vice president Dan Yergin told CNBC on March 30. “It’s unprecedented. That’s six times larger than the biggest downturn during the financial crisis period [in 2008].”
Platts believes Brent could be trading at as low as $12 per barrel in May, but “prices could easily dip into the single digits, whatever it takes to get significant supply off the market and quickly.”
The unprecedented downturn is set to cause global upstream capital spending to plummet by up to $100bn this year, or around 17%, Rystad wrote this week, from $546bn in 2019. In a low- case scenario where Brent averaged $25 per bar- rel this year, investment could drop by around $165bn, it warned.
“As companies are now losing solid oil market ground for a second time in recent years, it will be far more challenging to act quickly and reach the same high level of investment revision with- out taking a heavy toll on E&P’s performance,” Rystad analyst Olga Savenkova said.™
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w w w . N E W S B A S E . c o m Week 13 01•April•2020