WTI dropped into the low $20s on Wednesday, and the near-term outlook is grim.
Oil lobbyists have pushed Congress for help, and a group of Republican Senators pleaded in a letter to the Saudi government to back off the price war, but there is little evidence to suggest that a dozen U.S. Senators will be able to convince Saudi Arabia to change course.
In any event, the focus of the Senators on the oil glut is troubling, when the global pandemic continues to spread. In Bergamo, Italy, the death toll his climbed so high that the army was called in on Wednesday to move coffins. The number of deaths spiked in Spain, and the spread of the virus is accelerating in the U.S.
In the U.S., the availability of coronavirus tests remains depressingly inadequate, and medical equipment is alarmingly scarce in much of the country. The shortage is set to continue for some weeks. The Centers for Disease Control and Prevention (CDC) has advised healthcare workers to use “homemade masks (e.g., bandana, scarf) for care of patients with Covid-19 as a last resort,” but cautioned that their efficacy is “unknown.”
Without a coherent response, much of the country is going into some form of a lockdown, precipitating an economic crisis, which could yet be compounded by a financial and credit crisis.
As much as some U.S. Senators want to Riyadh to fix the oil market, the reality is that the coronavirus is the overarching story. Oil companies will not climb out of the abyss until governments get a handle on the pandemic. “Unless politicians decide (and get public support) to let thousands (or maybe even millions) of elderly and sick people die from Covid-19, the virus is set to result in a nearly global lockdown situation,” JBC said.
“At pretty much any other time, the industry media would still be full of speculation on Saudi motives, and potential exit strategies, but at this point everybody is busy just catching up to the latest developments” with the coronavirus, JBC Energy wrote in a report.
To be sure, Saudi Arabia is surely sticking the knife in, flooding the market at a time of economic meltdown. But an extra 2-3 million barrels per day (mb/d) of supply pales in comparison to the more than 10 mb/d of demand destruction. JBC said that oil price movements are “coming increasingly from” day-to-day news on the pandemic, rather than from OPEC.
The fastest way out for the oil industry, then, is for governments to slow the spread of the pandemic. The economic crisis can only be resolved when the health crisis is resolved.
Some oil executives still do not see it that way. Harold Hamm’s Continental Resources issued a press release on Thursday that appeared detached from reality. The company sensibly announced 55 percent cut to capex for 2020, but then quickly shifted from the capex numbers to the “illegal dumping” by Saudi Arabia and Russia. “We believe this is a short demand cycle which could see some near-term correction when this illegal dumping practice is halted,” Continental stated.
Characterizing the worst case of demand destruction in history as a “short demand cycle” is wildly off the mark, as is the notion that there could be a “near-term correction” if only the U.S. government would open an anti-dumping investigation.
Other shale companies are more resigned to their fate. The list of drilling companies in various stages of exploring debt restructuring now includes Whiting Petroleum, Antero Resources, California Resources, Chesapeake Energy and Gulfport Energy, to name a few. “At the moment most companies are on life support with the exception of Exxon [Mobil] and Chevron,” an oil and gas banker told the FT.
Occidental Petroleum’s huge dividend cut did not spare the company from seeing its credit rating cut into junk territory by Moody’s.
Shale output won’t drop immediately since E&Ps already drilling wells will likely see their projects through in order to recoup at least some of their costs. Related: WTI Rallies 22% In Panic Stricken Markets
Meanwhile, Canadian oil companies are arguably in even worse shape with Western Canada Select (WCS) dropping as low as $7.47 per barrel on Wednesday. As Bloomberg noted, oil sands producers cannot easily ramp down production, so they may decide to operate at a loss, burning through capital, rather than cut output. However, if WCS prices remain in the dumps for months to come, producers may begin to shut in production.
Shale executives and their Republican allies are right about one thing – Saudi Arabia can clearly outlast Texas drillers, despite notions of American “energy dominance.”
“[P]roducers may drop out of business en masse, in some cases for good,” JBC Energy concluded. “And in one year’s time, Saudi Arabia may sell 10 million b/d at $40 instead of 7 million b/d at $50.”
By Nick Cunningham of Oilprice.com
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