As markets brace for yet another week of total liquidation (even gold fell below $1500), oil drillers are preparing for the worst.
Last time crude traded this low, back in 2016, U.S. oil firms entered survival mode, slashing costs, cutting jobs and optimizing drilling processes. But this time, there's not a whole lot left to cut.
The 2014-2016 oil price crash happened gradually, over the course of several months. 2020's crash happened in just a few weeks and could end up being a lot more destructive.
IHS Markit expects the 'largest-ever oil glut' to be between two and four times bigger than the 2015-2016 glut of 360 million barrels. All of this is happening at a moment that global crude demand is tumbling. Analysts even believe that the current drop in oil demand will turn out to be the most dramatic decline in history.
Hedge fund chief Pierre Andurand was quoted by Bloomberg as saying that "This global pandemic is something the world hasn't witnessed since 1918," and that "I do not see how the demand drop wouldn't be multiples of the drop witnessed during the global financial crisis."
Trafigura, one of the world's largest independent oil traders even expects consumption of crude oil to fall by some 10 million bpd until May, reflecting a 10 percent drop in total global demand, spelling a doom scenario for crude markets. Related: Saudi Arabia Strikes Back At Russia In Key Oil Market
So what does this mean for the upstream oil and gas industry? Many drillers, oilfield service companies, and suppliers already had less meat on the bones, and a good portion of them continue to fail to sustain a positive free cash flow.
The drastic cost-cutting that started this week will have a direct impact on oilfield services and suppliers, but also exploration companies are set to become immediate victims of the price plunge. Morgan Stanley estimates that most companies will revise their budget guidance downward by about 25 percent.
In an interview with Bloomberg, Matt Johnson, Chief Executive at Primary Vision, an industry data tracker, says that E&P spending could come down 40 percent before the end of the year and that, in the Permian alone, 1,500 to 3,000 oilfield service jobs could be at risk of disappearing in the next two months.
U.S. oil firms will turn to their suppliers and service companies and once again ask for serious discounts. As I wrote on Friday, Parsley Energy asked service providers "to reconsider your pricing," and help them achieve an "at least 25 percent" reduction in costs. But oilfield services are arguably in a worse position. "Anyone dumb enough to ask for a discount today is an (expletive)," a drilling executive who did not want to be identified said.
Either way, OFS companies might not have a choice, and it'll be sink or swim situation if prices don't rise to at least $40+ per barrel within the next 8 weeks.
The U.S. and Canadian rig counts are already coming down, and this trend is expected to accelerate in the next couple of weeks as drillers focus operations on the lowest cost wells. Given the current production shut-ins and spending cutbacks, Oilprice.com expects a rig count decline of 20-25 percent within the next 3-4 months. Related: Yergin: No End In Sight For The Oil Price Crisis
But it's not just short-cycle drilling operations and ongoing projects that are being slowed down. New (mega)projects are now unlikely to receive the green light. Kallanish Energy reported that Husky Energy's Lloydminister thermal projects ''have been deferred and will be reconsidered as market conditions improve''. Kallanish also reports that Husky has deferred projects in offshore China and the development in Indonesia of the MDA-MBH natural gas field.
Several megaprojects such as the $14 billion LNG Quebec facility are teetering on the brink as large investors such as Warren Buffett's Berkshire Hathaway are pulling out. Sadly, deferring or scrapping exploration and production projects completely might be the only way for oil & gas firms to ride out of the storm.
Going forward, the industry should brace for more pain, as not even a Fed emergency rate cut of 100 basis points could keep oil prices from tumbling on Monday morning, stoking fears of $10 oil.
By Tom Kool for Oilprice.com
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Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com's Head of Operations More