Page 6 - FSUOGM Week 12

FSUOGM COMMENTARY FSUOGM
some of its oil storage volumes, Rystad said in a recent research note.
In contrast, Trump this month took the oil industry’s advice and ordered the Department of Energy (DoE) to start buying oil to fill the coun- try’s strategic reserves. The department said on March 19 it would seek to acquire 30mn barrels of oil and more in the future. Meanwhile, Texas’ energy regulator, the Texas Railroad Commis- sion, is considering limits on production because of low prices, according to the WSJ.
Other OPEC producers also intend to ramp up supply, while Russia has said it can bring an additional 300,000 bpd of oil on stream within three months. National oil firm Rosneft is pre- dicted to play a key role in providing the extra supply. It recently launched trial operations at a mid-sized West Siberian field it operates with Gazprom Neft. The company is also moving ahead with full-scale development of one of East- ern Siberia’s largest oilfields.
Not all Russian producers are on board with the supply war. Lukoil, which lacks the capacity to increase production in Russia, has urged the government to renew negotiations with OPEC.
Russia will be able to maximise its exports, as many of its refineries are due to wind down operations over the coming months for routine maintenance.
Oil price outlook
As producers prepare to flood the market, the outlook for oil demand continues to weaken. Fitch Ratings is predicting a y/y decline in con- sumption of 7-10mn bpd in the second quarter. Goldman Sachs expects Brent to average just $20
per barrel in the three-month period. The effect of the coronavirus on demand will peak in late March, at 8mn bpd, the bank said last week, fore- casting a supply surplus of 3.9mn bpd and 5.7mn bpd in the first and second quarters respectively.
Uncertainty over the pandemic’s severity and duration, as well as what actions producers will take, makes it difficult to predict oil prices mov- ing forward. But if they remain low, the impact on supply will be profound.
Wood Mackenzie estimates that at a Brent price of $35 per barrel, revenues from 4mn bpd, or 4% of global oil production, do not cover costs and the government share. This rises to 10mn bpd if prices remain at $25 per barrel.
“In the short term, companies, governments and other stakeholders are likely to continue pro- ducing assets at a loss, as they have in the past, in the hope the price will rebound quickly,” Wood Mackenzie said in a research note on March 20. “But the current trifecta of oversupply, demand evaporation and global behemoths fighting for market share may require immediate and dra- matic action.”
“If prices don’t rebound, the taps will inevi- tably be turned off. Shut-ins will be more sub- stantial than 2015/2016,” the Edinburgh-based consultancy said. “Given the difficulties and costs associated with restarting mature production, a proportion of this supply may never return.”
Output over the longer term will also be affected, as producers have cut all or most of their discretionary spending to protect their balance sheets. This means that projects that had been due to come on stream in 2021, 2022, 2023 and further ahead will be delayed. ™
Russia’s Rosneft is already moving ahead with new projects, in preparation for the supply war.
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Week 12 26•March•2020