DA NANG – Major oil producing nations like the US, Saudi Arabia and Russia, and major global oil and gas companies such as BP, ExxonMobil and Chevron, were supposed to have the foresight and savvy to respectively manage national risks and keep their industries in balance.
In the past OPEC, and since 2017 OPEC+, has had at least marginal success or better in micro-managing global oil production and supply to keep prices on a relative even keel, as cartels are designed to do.
Those days are now long gone and it’s not clear to analysts that producers will agree any time soon to the only choice they have to avoid a full industry collapse: another production cut deal.
The last two days (April 20 and 21) have seen the wildest oil trading in history, with oil-producing nations, energy majors and politicians alike scrambling to stop the economic contagion that collapsing oil prices are having on global stock markets and economies.
On Monday, the NYMEX-traded West Texas Intermediate (WTI) oil benchmark’s futures contracts for May collapsed, plunging into negative territory for the first time in its history.
It ended the day at a punishing -US$37.63 a barrel and dragged down spot prices for both WTI and global oil benchmark Brent crude with it.
June WTI futures, the new front month futures contract, plunged some 30% on Tuesday to a mere $12.80 per barrel, after dropping as low as $11.50 per barrel at one point.
To show just how bad the carnage is and will continue to be, some physical cargoes in the US, including Alaskan crude, were still trading in negative territory, an indication that producers are literally paying buyers to take the commodity off their hands.
Brent, the stronger of the two benchmarks due to its more global exposure than WTI’s US orientation, dropped nearly a quarter (24%) to $19.60 per barrel.
Early trading in Asia on Wednesday (April 22) showed more of the same as oil prices remained under immense pressure as worries over rapidly filling global storage space stirs market concerns.
Analysts predict that within weeks there will be nowhere to put all of the fuel’s oversupply amid the worse oil demand destruction in the industry’s history.
April, now entering its last week, will see more of the same as some 25 million barrels per day (bpd), (even as high as 30 million bpd) of demand destruction for the month hits oil markets.
With a third of the world under some kind of lockdown, oil demand will not quickly return, potentially not until a Covid-19 vaccine is found which could be as far off as the end of the year or even into 2021.
Until then, the likelihood grows that major oil-producing nations, especially OPEC members, including OPEC de facto leader Saudi Arabia and non-OPEC member Russia will hit dangerous and uncharted waters as their fiscal balance sheets slip deeper into the red.
The US, the world’s top oil producer, will also take bigger economic hits from the collapse of both global and domestic oil markets. But because the US economy is multilayered and diversified, it will not suffer to the extent of the Saudis and Russians.
Saudi Arabia, which has an oil price fiscal break even point of $85 per barrel according to the International Monetary Fund (IMF), is facing a potential financial catastrophe.
A look at how the kingdom survived the last rout in global oil prices from 2015 to 2017 is instructive to how Riyadh may respond.
In July 2016, the Saudis issued their first international bond sale to the tune of $10 billion to make up for the loss of revenue from oil prices that had collapsed from $115 per barrel in mid-2014 to under $26 per barrel in January 2016.
The kingdom also started burning through its foreign reserves to balance its books, which dropped from a peak of $737 billion in 2014 to just over $500 billion by the end of 2016.
There was even talk at the time, both within the Saudi government and outside the country, that its economy could collapse.
If the Saudis already experienced severe economic headwinds from prices in the $30s to $40s price range in 2015 and into 2017, the potential for a major economic upheaval from the current oil market turmoil is even more cause for concern.
Russia, which has a fiscal break even point in the mid-$40s per barrel range, can survive longer than the Saudis. But if prices remain at current levels or lower, Moscow will also have to eat into foreign reserves to fund its national coffers.
There are only two options to lift global oil markets out of decline, and both are painful.
The first is to let the economic devastation of the Covid-19 pandemic run its course, wiping out tens of millions of barrels per day of oil demand while excess production fills up global storage until there is nowhere else for it to go.
Under this overflow scenario, forced production shut-ins will ensue, as already seen in the US and Canada, and consequently remove the current overhang to restore supply and demand equilibrium and put prices back on an upward trajectory.
The other option would be more difficult: another OPEC+ oil production cut deeper than the first round announced two weeks ago. Such an agreement would ease oversupply and place a floor under prices to keeping Brent and WTI from entering zero or negative territory.
For the Saudis, Russians and other OPEC+ members, and non-members like the US, to not only meet but put in place a second Covid-19 oil cut deal would take more political fortitude than the participants can likely muster. Meanwhile, the market carnage continues.