Oil producers fear worst-case scenario from coronavirus


A catastrophic situation for the oil industry might see prices dropping into the $US30-to-$US35 per-barrel range for Brent, and lasting for several months. This situation presents a particular problem and threat for oil producers that would be significantly more severe than they faced when Brent prices last dipped into the low $US40s and mid-$US30s in 2015 and 2016. Then, the price of oil fell because producers were pumping as much oil as they could. But if prices were to fall that much now due to the coronavirus outbreak, it would happen at a time when most producers have tempered their output.

OPEC and its partners in OPEC+ are limiting production, and even considering further cuts to combat the demand destruction. So, in the feared coronavirus scenario, producers such as Saudi Arabia, Russia and the United Arab Emirates would face low prices in conjunction with lower production. This would severely curtail their revenue.

If, for example, Saudi Arabia exports 6.85 million barrels per day (which it did in January 2020, according to data from TankerTrackers.com) and the price of Brent dropped $US20 per barrel without any increase in production, its state-owned oil company Aramco would lose $US137 million per day in export revenue – or almost $US4.2 billion per month.

Should this low-demand/low-production scenario come to pass, countries such as Saudi Arabia, Russia, the United Arab Emirates and others would face direct hits to their coffers. Their deficits would rise; the services provided by their governments to satisfy the populations might be reduced; and their economies would suffer. If the situation lasted long enough, economic instability could have political consequences.

The US, currently the world’s largest oil producer, wouldn’t be immune; producers there would face harsh business consequences but for different reasons. Unlike OPEC+ countries, US oil firms, particularly shale firms, are producing at record rates. However, most companies producing in the shale-oil patch have higher break-even points than big oil producers elsewhere. If prices drop significantly and don’t recover quickly, the US could see another oil bust, resulting in bankruptcies and layoffs. And while coronavirus might bring lower petrol prices for American consumers, it is equally likely to strike the US economy in one of its most successful sectors.

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The worst-case scenario may well be avoided and certainly that’s to be hoped for, in the name of world health and economic stability; but with the crisis still raging and so many unknowns, it’s prudent to consider all possibilities.

Ellen R. Wald is president of Transversal Consulting and a nonresident senior fellow at the Atlantic Council’s Global Energy Center.

Bloomberg



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