On March 30th, crude oil prices reached a 17-year-low, with the COVID-19 crisis and the Saudi-initiated oil price war.
US benchmark West Texas Intermediate fell 5.3% to trade at $20 a barrel, while international benchmark Brent crude was off 6.5% at $23.
The falls came after the death toll from the pandemic surged past 30,000 at the weekend as cases in hard-hit Europe and the United States showed no sign of letting up.
Consumption is expected to drop by 26 million barrels, or 25%, this week as social-distancing measures to contain the coronavirus now impact 92% of global GDP, analysts including Jeff Currie and Damien Courvalin said in a note. There’s been at least 900,000 barrels a day of announced shut-ins at the wellhead, with the true number likely higher and growing by the hour, they said.
“The ultimate magnitude of these shut-ins, which is still unknown, will likely permanently alter the energy industry and its geopolitics,” the analysts said. Landlocked crude prices are heading into negative territory and will eventually create an inflationary oil supply shock because so much production will have been halted, they said.
This mostly relates to US, Russian and Canadian crude oil.
The price war launched by Saudi Arabia almost three weeks ago after talks with Russia over price stabilization broke down has sent prices to their lowest level in 17 years.
The Brent crude price was around $65 per barrel at the start of January.
“In recent days there has been a lot of chatter that demand for oil is going to be hit severely in the months ahead, hence by dealers are dumping the energy,” said David Madden, market analyst at CMC Markets.
“The bitter price-war between Saudi Arabia and Russia is hurting oil too.”
Faith Birol, head of the International Energy Agency, yesterday said oil prices could fall by 20 percent with 3bn people around the world on lockdown.
“One would expect that Saudi Arabia will provide a constructive support to the stabilisation of the global oil markets based on their past record,” Birol said.
There is still no such constructive support provided by Riyadh of any sort.
At the same time, natural gas prices are also being affected, with them currently dropping, but chances are they will rise rapidly in 2021.
The bust in the gas sector brought production to a halt as even sub-$2.50 gas was largely unprofitable. Late last year, Chevron took an $11-billion write-down, and a big chunk of that was from its shale gas assets in the Marcellus. Pittsburgh-based EQT also announced a $1.8 billion write-down at the start of 2020.
The rapid pace of fracking in the US over the last few years led to a supply glut even prior to the onset of the coronavirus. Associated gas in the Permian, along with record production in the Marcellus shale in Appalachia, crashed prices below $2/MMBtu at the start of 2020.
“[A]s we enter the 2020/21 winter, we expect production declines to be visible enough that gas prices will rally sharply in our view to help summer 2021 reach comfortable inventory levels,” Goldman Sachs wrote in a report on March 24th.
“Under current forward prices, we believe this would lead US natural gas balances to a record-low level that summer, nearing only 2.2 Tcf,” Goldman analysts wrote. “This would be the result of an estimated 2.4 Bcf/d summer-on-summer decline in production matched up against a 5 Bcf/d expected increase in demand.”
“This exceptionally tight outlook suggests current forward prices are not sustainable,” the bank concluded.
Regarding oil Goldman Sachs said Brent crude will likely stay near cash costs of $20 a barrel with temporary downward spikes as waterborne varieties are better positioned compared with landlocked oil in the U.S., Canada and Russia that’s sitting behind pipelines.
The current oil crisis will see the energy industry finally achieve the restructuring it so badly needs, although a push for de-carbonization from capital markets may hamper the broad investment required for a recovery, the analysts said.
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