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Oil prices keep falling. Nobody could imagine that oil prices would hit their 17-year lows in less than three months. Analysts shift the blame on the novel coronavirus outbreak, which has degenerated into a global crisis. The Covid-19 outbreak caused economic stagnation and demand for oil and petroleum products dropped severely.
However, Covid-19 was not the only factor. A price war between Russia and Saudi Arabia – as two leading members of the OPEC+ group – about whether or not to cut oil output following their March meeting overshadowed the oil market and oil prices.
The decline in oil prices has given rise to ifs and buts for shale oil production. The key question is to know whether or not the current trend of price decline would endanger US energy security.
Morteza Behrouzifar, senior energy economics expert, told Iran Petroleum that the long-term strategy envisaged by the US was to reduce reliance on energy imports from the Middle East.
He said: We should not expect periodical developments to affect this policy.
Goldman Sachs expects oil demand to fall by 10.5 mb/d in March and possibly by as much as 18.7 mb/d in April, the Wall Street bank said in a note dated March 25.
A demand shock of this magnitude will overwhelm any supply response including any potential core-Organization of the Petroleum Exporting Countries output freeze or cut, the investment bank said.
Refiners across the world have been reducing operations as the spread of the coronavirus has led to steep falls in aviation and motor fuel demand.
Yet, while we expect a further sharp sell-off in oil prices in coming weeks, we increasingly see risks that the rebound in prices will be much sharper than our base-case rally back to $40 per barrel Brent by fourth quarter of 2020, the bank said.
Behrouzifar said: That’s true that global demand for oil has declined, which would directly impact shale production. However, it would be unlikely to think that periodical developments (like Covid-19) would change the US energy security policy and its planned lower dependence on Middle East oil imports. The US has been pursuing this policy for more than four decades now.
He said: The trend of development of technology in shale production is not static. Rather, it is dynamic. Once shale oil production cost $80 in the US, but now it has been cut to below $30 thanks to new technologies.
Oil Price Fall to Continue?
As the Covid-19 outbreak affected many businesses across the world, global demand for oil is expected to see a 15-20% decline in the second quarter of 2020.
Deep output cuts by OPEC and other oil producing nations will not prevent a huge buildup of crude, the head of the International Energy Agency (IEA) said, urging the world’s richest economies to discuss broader ways to stabilize oil markets.
Fatih Birol, executive director of the IEA, told Reuters that measures to contain the spread of the coronavirus had led to an unprecedented demand loss that could reach as much as a quarter of global consumption.
Even with output cuts of 10 mb/d, the equivalent of 10% of global supply, oil inventories would still rise by 15 mb/d in the second quarter, Birol said.
This would mean that there will still be huge pressures on global oil markets, the head of the energy watchdog said.
Asian refineries continue to lose big revenues as demand for oil is on the sharp decline.
Behrouzifar said: I don’t think oil prices would keep falling and remain below $20 on the long-term. Of course if the stagnation caused by Covid-19 remains in full force for another six months, it will definitely affect capital costs and oil prices, in which case the prices would keep falling.
He said: The wells that are currently producing shale would no longer need any CAPEX and production from these wells would only require running costs. Therefore, I don’t think that shale oil production would be affected in the short-term.
However, in case this trend continues it will affect the development of shale production in the long-term and there might be reduced shale production, he added.
Oil prices are on the downward trend, while there is no demand for it. Many nations were seeking to increase storage due to reducing prices. However, speculators warned that the decline in crude oil demand due to the Covid-10 outbreak had led to a supply glut. That would saturate crude oil storage tanks and pipes to unprecedented levels in history.
The U.S. Department of Energy said it has ditched plans to purchase crude for the nation’s emergency reserve due to a lack of funding from Congress, dealing a blow to President Donald Trump’s plan to give relief to energy companies amid the global oil market collapse.
Energy Secretary Dan Brouillette had asked lawmakers for $3 billion to purchase up to 77 million barrels to fill the reserve, but the stimulus package passed by the Senate did not include the funding. The initial purchase was to be 30 million barrels.
The purchases were seen as a way to absorb some of the glut in crude markets caused by demand erosion from the coronavirus pandemic and a flood of supply from top producers.
OPEC Set to Collapse
Every time oil prices go on the decline or any dispute breaks out between the OPEC member states, analyses and rumors emerge of the imminent collapse of the OPEC. This time, OPEC+ cooperation is under scrutiny.
The differences between Saudi Arabia and Russia about cutting oil production represent a key factor in the oil price war whose aim is to get a bigger share of the market. That is why speculation is rife that the OPEC would soon collapse.
Behrouzifar said: I don’t think that the OPEC would collapse. However, the disagreement between these nations over a production ceiling caused a decline in prices. Meantime, the Covid-19 crisis has reduced global demand for oil, but the market is not oversupplied yet. Such developments are more psychological than realistic.
But who is suffering the most? Behrouzifar said: Oil production cost in Saudi Arabia much lower than in Russia. Furthermore, Russia is under sanctions whose persistence would add to Russia’s economic problems. That pushes the Russians to sit at the negotiating table with the Saudis again to talk about how to bring back balance to the oil market.
He said Saudi Arabia and Russia were likely to reach agreement on oil output reduction in the near future.
It would be unlikely that the Covid-19 crisis would drive oil prices back to below $10. If oil prices fall to such levels, big suppliers like Saudi Arabia, Russia and Iraq – depending heavily on petrodollars – would face many challenges. Then they will definitely cut their output to push prices up, he said.
Behrouzifar said: As oil prices fall sharply, speculation is rife again about the OPEC collapse. I believe that any disintegration of the OPEC would be beneficial neither to its own members nor even to the US.
In the first place, price falls may benefit the US, but it will in the long-term negatively affect unconventional investment and we will no longer have any extra capacity for production. Then, oil prices will make a jump, which would benefit neither producers nor consumers, he said.
Behrouzifar said: As analyses show, $55 to $60 a barrel is good. If you remember when oil prices were low, OPEC+ nations agreed to curb their output in order to keep the market balanced to bring prices back to reasonable levels.
Referring to US oil sanctions on Iran, he said: The sharp decline in oil prices significantly affected the oil income of big oil producers: Saudi Arabia and Russia. However, it does not apply to the Iran sanctions and Iran has been harmed the least.
Behrouzifar said: However, the Covid-19 crisis proved once more that we are living in an interconnected world where all nations should collectively find a solution to this crisis.
