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Robert Rapier

Robert Rapier

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A Once-In-A-Lifetime Warnings For Oil Investors

Last week Royal Dutch Shell did something that would have been nearly unthinkable at the beginning of this year. The company cut its dividend for the first time in 75 years. This is remarkable considering the ups and downs of the oil industry of the past few decades. Prices have collapsed many times since then, albeit we have never before seen a major benchmark turn negative.

But the COVID-19 pandemic has hit oil demand in an unprecedented way. A few days ago, Bloomberg posted an article showing that energy demand has just dropped by the largest percentage since World War II (which was the last time Shell cut its dividend).

That’s true, but in 1945 global oil demand had yet to reach 10 million barrels per day (bpd). In contrast, COVID-19 has sidelined an estimated 30 million bpd of oil demand. Thus, the global oil industry is coping with the largest demand collapse, by far, in its history.

This demand collapse is impacting both refiners and oil producers. Shell, as an integrated supermajor, is both. Refiners often benefit from falling oil prices, because they generally see margins expand. That’s why an integrated oil company is usually more stable during the ups and downs of oil prices. Upstream (oil and gas production) and downstream (refining) generally perform out of phase with each other, which helps balance out the cycles.

But the current collapse is hitting both ends — oil demand and finished product demand. This creates one of the most challenging economic climates the integrated oil companies have faced — perhaps ever.

Norway’s Equinor previously announced a two-thirds dividend cut, and now Shell has followed. Chevron’s CEO has publicly stated that the company has enough cash on hand for now to maintain its dividend, but it will also come under increasing pressure as long as oil prices remain depressed.

The oil producers and the refiners will remain under the most pressure, while the integrated companies won’t be far behind. The midstream sector — pipeline companies — is in somewhat better shape. However, they are not immune to the forces impacting the rest of the energy sector, as Plains All American Pipeline showed when they recently announced a distribution cut.

Related: Trump’s Corn Crisis Is Back

I think investors should heed the underlying warning in Shell’s first dividend cut in most of our lifetimes. Consider the pressure they must have been under not to break their 75-year streak. That is evidence that they see the current crisis unlike others the oil industry has faced in recent decades. They aren’t sure when oil demand will recover.

Thus, investors should be exceedingly cautious in the energy sector for the foreseeable future. This is especially true of oil-weighted producers, and refiners.

Safer bets are midstream companies and natural gas producers. Natural gas producers have shown much greater strength than oil producers because associated natural gas production is falling as oil producers shut-in production. That means natural gas supplies will continue to tighten in the months ahead.

By Robert Rapier for Oilprice.com

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  • Mamdouh Salameh on May 11 2020 said:
    There will be radical changes in the competing interests of major players in the global oil market in the aftermath of the coronavirus outbreak.

    The global oil industry has no alternative but to cut dividends drastically if it is to survive rather than sink under the weight of its outstanding debts. It will most probably opt for cutting dividends with Equinor and Royal Dutch Shell leading the way forward.

    OPEC+ will emerge much stronger with a real acknowledgement by the world of the pivotal role it plays in ensuring the stability of the global oil market and prices grudgingly accepted even by the United States.

    Russia and Saudi Arabia in their capacities as the world’s largest crude oil producer and the world’s largest crude oil exporter respectively will always compete for market share. Still, they will cooperate where they see mutual benefits. Both Saudi Arabia and Russia share one major objective, namely the elimination of US shale oil industry from the market.

    The United States' crude oil imports will start trending up again from an estimated 9 million barrels a day (mbd) in 2019 to 10-11 mbd in the next 2-3 years.

    The US shale oil industry will emerge leaner with far less influence in the global oil market but will always be needing a life support machine provided American tax payers.

    China will continue to be the uncontested driver of both the global economy and the global oil market well into the future.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Mike Tory on May 12 2020 said:
    Well it’s a good thing have been robbing us for the past 25 years on ridiculous gas prices so good on them I hope they have to sell the gas bought mansions and there children starve fuck corporate whores and what do they expect people to actually feel bad that they cannot live there lavish life anymore
  • Rudolf Huber on May 15 2020 said:
    It's never nice to break a 75-year streak but those are exceptional times and when would one ever do that if not now? When would shareholders and the markets forgive it to you f not now? Because there might be another reason for ding that. The oil market will recover - I have no doubts about that and I would expect that the eggheads at Shell see it the same way. But while the mayhem lasts, smaller projects will hit hard times which means lots of potential takeover targets if one has the cash for that. Just imagine Shell hoards cash for the buying spree. Just a thought.

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