Global oil market still reeling from price war and virus downturn

Linda J. Dodson

But ultimately, Russia’s risky geopolitical gambits, Saudi Arabia’s attempts to flood the market with oil, and the machinations of Opec, faded as the black hole of coronavirus steadily continued to expand, swallowing everything.

As March dragged on and more countries went in to complete lockdown to curb the spread of the virus, the destruction of demand became so severe that the price war became untenable.

Rapprochement

Just over a month after the price war began, it was over again.

On April 9, the world’s leading oil nations agreed once again to slash their output in a desperate effort to save the market from collapse.

Led by Russia and Saudi Arabia, the group of 23 countries pledged to cut production by at least 10 million barrels a day – a staggering increase on the amount suggested at the beginning of March. Saudi Arabia had been coerced into making a deal by US President Donald Trump, who threatened to cut military aid to the kingdom.

Russia, in turn, was brought to heel by the catastrophic impact of coronavirus on the global economy. Either way, the damage was done.

“It’ll likely take three years to work off excess stocks – maybe longer,” says Jamie Webster, an energy analyst at Boston Consulting Group. “Higher prices are very far down the track, and it is possible we are not actually going to move back to those prices, ever.”

For now demand will remain deeply depressed due to coronavirus, and supply will continue to far outweigh demand. To make matters worse, storage space for excess oil is almost full.

“The last gasp to balance this market is to shut-in production,” he adds. “This looks like where the market is going.”

Nuclear option

To shut-in production, or to stop wells from pumping, will be devastating and will result in huge job losses and a raft of bankruptcies, experts say.

“This creates a particularly stark challenge for the US,” says Reed Blakemore of the Atlantic Council Global Energy Center, “where a prolonged low-price environment has already introduced considerable stress on small cap producers.”

Now the shale industry is bracing for a crisis. Most companies in the industry, especially those laden with debt, are not economically viable when the price falls below $50 (£41). It is at $22 (£18) a barrel.

Distressed debt in the North American energy sector has increased to $190bn (£156bn), growing by more than $11bn (£9bn) in the last week alone. The industry faces $86bn (£70bn) in debt that comes due in the next four years, according to Moody’s.

The largest US producers were hit with a combined loss of $26bn (£21bn)in the first quarter, forcing more than $38bn (£31bn) in write-offs, according to Rystad Energy.

But the tripartite conflict and the subsequent downturn has not just devastated America’s oil industry. Saudi Arabia, the de facto leader of Opec, has seen its economy smashed and is battling profound fiscal challenges and the urgent need to reform.

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