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Oil Majors Are Preparing For $10 Oil

The wave of oil industry spending cuts continues, with the majors now announcing significant reductions to spending as oil remains stuck in the $20s.  Royal Dutch Shell said on Monday that it would cut spending by 20 percent, or about $5 billion, and also suspend its share buyback plan. French oil giant Total SA and Norway’s Equinor announced similar moves.

ExxonMobil and Chevron have suggested they too would be axing their budgets, with Exxon under particular pressure. Goldman Sachs estimates that Chevron needs $50 per barrel in order to cover spending and its dividend. ExxonMobil, on the other hand, needs something like $70. 

The majors are relatively more insulated from the downturn than small and medium-sized shale drillers because they have downstream refining and petrochemical assets that have typically performed somewhat better than upstream units when prices fall. Refineries, for instance, spend less on oil during the downturn, and low prices also translate into a boost in sales of refined products. 

But the majors do not have that cushion this time around. We are in the midst of a historic meltdown – a supply crisis and a demand event with no precedent. Estimates vary, but oil consumption could be off by 10 million barrels per day (mb/d), or more. It doesn’t matter how cheap crude is, if people are not driving, flying or consuming anything aside from the bare essentials, there is no demand boost from low prices. 

On Monday, Exxon announced that it was cutting production at its Baton Rouge refinery, the company’s second largest in the U.S., because poor demand has filled up storage tanks. Exxon also cut 1,800 contractors from the site. In another example, a major closely-watched petrochemical project in Appalachia may not go forward as the market sours.

The first round of spending cuts from the oil industry is now visible, but a second round is beginning, according to a report from Goldman Sachs. 

Related: Canada Braces For Oil Cuts As Storage Nears Limit

“We see US oil production falling almost 1.4 mn bpd over five quarters post 2Q20 based on reduced drilling (i.e., before considering shut-ins of existing wells that are likely to be needed) with covered company capex down 35% [year-on-year] in 2020,” Goldman Sachs wrote in a note. 

However, budget revisions are not over. The slide in spending, drilling and ultimately in output could deepen as capex cuts grow more pronounced. “There is no sugar coating it, U.S. oilfield activity will collapse with oil prices well below $30 WTI,” Raymond James said on Monday. The initial round of cuts put spending at about 45 percent below 2019 levels, the bank said. “However, the declines will be far more dramatic than these initial cuts and we stress that these announcements skew towards larger cap, better hedged and capitalized operators.” 

“Total U.S. capex is likely to fall in excess of 65% with a WTI price persisting in the $20s,” the investment bank concluded. 

Rystad Energy put out a similar estimate on Monday. E&Ps are likely to cut project sanctioning by up to $131 billion, or about 68% year-on-year, according to the Oslo-based firm. “Upstream players will have to take a close look at their cost levels and investment plans to counter the financial impact of lower prices and demand. Companies have already started reducing their annual capital spending for 2020,” says Audun Martinsen, Rystad Energy’s Head of Energy Service Research.

It's anybody’s guess how low WTI and Brent go. But more than a few analysts have pointed to the potential for storage to max out as a reason why prices have more room to fall. “[N]o one can exactly be sure that production will be shut-in fast enough to not overwhelm our ability to store oil,” JBC Energy said in a note. The firm pointed to refineries cutting processing because they are running out of storage, such as Exxon’s Baton Rouge. “In such an environment, it is as possible for Brent prices to briefly go to $10 per barrel as it was back in 1986 or 1998,” JBC concluded. 

By Nick Cunningham of Oilprice.com

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Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon.  More

Comments

  • Mamdouh Salameh - 24th Mar 2020 at 8:10am:
    With the coronavirus outbreak still raging in most of the world, nobody is immune against its adverse impact.

    However, if oil prices fall to $10 a barrel, it will mean that the coronavirus has got such a grip on the world that we could be thinking of facing starvation, global bankruptcy and a complete collapse of law and order rather than a $10 oil.

    News coming from China indicate success in containing the outbreak with the leadership urging people to go back to normal activities. Similar news are coming out of South Korea. If the measures taken by China and South Korea are proving successful, then the world should adopt them pending the development of an effective anti-coronavirus vaccine.

    Once the outbreak is controlled, the global economy particularly China’s will behave like somebody who has been starved of food while in quarantine. Once allowed to eat, his appetite will be rapacious and that will exactly be the same with the global oil demand which will probably double or perhaps triple oil imports to compensate for lost demand.

    Soon the outbreak will be history with global oil demand and prices recovering all their recent losses.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Tony Mahon - 24th Mar 2020 at 8:37am:
    Yes may $5 ! , but I don't know how will survive the Oil producer, Saudi need $75 to cover the cost,
    US $70,you sure? Als if you have a business with an non endless merchandise , you will sell it with losing a lot of money !?? Keep dreaming my friend.
  • Don Lapre - 24th Mar 2020 at 9:27am:
    Oh Nicholas how is the world preparing for $10 oil when just 5 years ago Art Berman said it would be peak oil by 2020 when all the shale wells went dry ?
  • Don Lapre - 24th Mar 2020 at 11:00am:
    $10 is going to crush electric vehicles sales
  • Answerma Question - 24th Mar 2020 at 12:16pm:
    When does this drastic drop in oil get reflected in the gasoline prices? There has been a huge disconnect for years. Has prices are still close to three prices they were when oil was $150 a barrel
  • Michael Daniels - 29th Mar 2020 at 7:15pm:
    We have had enough of all that doom and gloom journalism guys, WE KNOW by now that oil prices are in the dog house, no point in beating a dead horse and squeeze dry that fear-mongering lemon, served to us by the shortseller community,- what the investing community needs now, are visionary views, telling us truthfully and focused upon economic necessities, that oil prices cannot stay in the dog house, - for they never have so far and cannot for simple economic reasons of viability of the oil industry. The world is already gradually, and will soon fully return to business as usual, - so let us discuss how to position ourselves for the recovery, which will take place with a probability of 1, with an absolute certitude.
  • Don Lapre - 5th May 2020 at 10:27am:
    Oh sweet Nicholas ! It’s now 6 weeks after you wrote this article and oil is at $25, are the majors still preparing for $10 oil ???
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