Oil prices plunged to an 18-year low yesterday as hopes of a production pact between Saudi and Russia faded
Benchmark Brent crude fell to $22.58 a barrel in early trading but later clawed back some of its losses to sit just above $26 as the London markets closed.
A combination of an oil price war between Saudi Arabia and Russia, and the Covd-19 pandemic, which has caused a collapse in demand as an estimated 1.7 billion people around the world are forced to stay at home, while also grounding most of the aviation industy, has sent prices crashing.
Keith Myers, head of research at market research and intelligence firm Westwood Global Energy Group, warned the downturn may be prolonged.
He added: “Uncertainty remains over its duration and depth. Brent is trading in the $20s per barrel (bbl) – well below its equilibrium trading range of $40-80/bbl, established since 2016, whilst global oil demand grew annually 1-2 million barrels a day and demand growth was being met mainly by US unconventional oil.
“The Covid-19 pandemic is having a catastrophic impact on oil demand. How long the travel bans and lockdowns that are driving the fall in demand continue is anyone’s guess, but it seems likely to be many months.”
Mr Myers said Saudi Arabia and Russia’s fallout over oil production rates had pushed more supply into the market at “just the wrong time”, driving down prices further.
He added: “A reconciliation will not be enough to reverse the fall in demand caused by the response to Covid-19.
“History suggests oil markets should recover. The timing and pace of recovery will depend primarily on the progress of the pandemic, the lifting of lockdowns and the pace at which the supply side responds with cuts.
“In the meantime, however, exploration and production companies, rig owners and service firms are back in survival mode. The corporate failure rate could be higher than in 2015-16 if the financial markets are less forgiving, which is possible, and without government support.”
Capital expenditure (capex) on global oil and gas exploration and production (E&P) will slump by around £80 billion, or 17%, this year, according to Norwegian consultancy Rystad Energy.
The firm’s “updated base case scenario” assumes an average of $34 per barrel in 2020 and $44 in 2021.
E&P capex reached £433.7bn last year, having recovered slightly from a two-year slump in 2015 and 2016, and then dived to an annual figure of £405.2bn.
This is compared with 2014’s historical high of around £700bn.
Olga Savenkova, upstream analyst, Rystad, said: “According to our data, the expected decline this year will make 2020’s capex volumes, estimated at about $450bn (£357.5bn), the lowest in 13 years.
“Our estimates before the coronavirus epidemic had indicated E&P would remain flat year-on-year.
“As April approaches, when Opec+ producers (14 members and 10 non-members of the Opec producers’ cartel) are expected to flood the market with even more additional oil, Brent prices are now at around $25 per barrel and are likely to decline even further.
“In a low-case scenario, where Brent averages $25 in 2020, global investments may plunge to around $380bn (£301.8bn) this year, falling to almost $300bn (£238.2bn) in 2021, a 14-year and 15-year low respectively.”
Ms Savenkova added: “As companies are now losing solid oil market ground for a second time in recent years, it will be far more challenging to act quickly and reach the same high level of investment revision without taking a heavy toll on E&P’s performance.
“The estimated cost cuts will be mainly achieved by lower activity within US shale, delays to projects that are yet to reach the final investment decision stage, deferred exploration activity, and cost cuts within development and production for conventional assets.”
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