Falling oil prices, biggest threat to US shale producers

The week ended on 13th March 2020 can be termed one of horrific weeks for crude oil producers and traders as prices went down about 50 percent since the start of the year. 

Oil rebounded a bit on Friday following movement in the U.S. Congress to pass a coronavirus economic relief bill. Nevertheless, the near-term looks dire for oil markets, with supply rising quickly as demand continues to collapse. The added threat is likely hike in output by OPEC and Russia.  

Analysts anticipate oil prices to remain at current depressed levels for months amid a price war and the fight for market share. They fear WTI Crude prices to hover around US$30/barrel in the near term. On Friday, WTI traded at US$33, but down by a massive 25 percent on the week for what is shaping up to be the worst week for oil prices since the financial crisis in 2008. Brent prices are also likely to remain range bond in the near term.

After the collapse of the OPEC+ production cut deal, major banks slashed their oil price forecasts, expecting an enormous oversupply in the market as Saudi Arabia, the United Arab Emirates (UAE), and Russia are turning on the taps and looking out for their own interests instead of trying to fix the prices.

Goldman Sachs has warned oil price may plunge to US$20, Standard Chartered says WTI Crude will average just US$32 a barrel in 2020, and ING slashed its Q2 Brent Crude forecast to $33, from US$56, to name a few.

Saudi Arabia has promised to flood the oil market with an extra 2.6 million bpd of oil from April, while its fellow OPEC producer and ally, the United Arab Emirates (UAE), pledged an additional one million bpd in supply. This will result in a total increase of 3.6 million bpd in global oil supply from OPEC’s heavyweights at a time of depressed oil demand due to the coronavirus outbreak. Russia indicates to raise production up to 500,000 bpd.   

According to the Wall Street Journal, Russia believes that low oil prices can damage U.S. shale producers. Outwardly, Moscow does not link its motivations to an intention to harm U.S. oil companies, but Russia had grown wary of the OPEC+ cuts, which contributed to a 4 million bpd increase in U.S. shale over the past three years. Western analysts believe that U.S. sanctions on Nord Stream 2 and Rosneft stoked ire in Moscow. 

 A study of 30 shale drillers accounting for 38 percent of total U.S. oil production finds that roughly 50 percent of their output is hedged at an average price of US$56. If WTI averages US$40 this year, the hedges would save the companies a combined US$10.5 billion or US$17 billion if WTI averages US$25. “There is definitely a significant amount of default risk,” said Michael Anderson, a strategist at Citi.