New Delhi: The oil price freefall is unlikely to be halted anytime soon as the forthcoming flood of supply, overwhelmed inventories and coronavirus-led demand shock would push further pressure on prices pushing it to tumble to nadir of $20 a barrel, the lowest oil prices in the last 20 years.
According to brokerage houses tracking the development, the focus of oil producers now seem to be have a market-share strategy rather than price targeting. This could see price undercutting, resulting in further crash of oil prices.
In its outlook for the latest report on oil sector, Motilal Oswal Investment Services has said that the oil market is now faced with two highly uncertain bearish shocks with the clear outcome of a sharp price sell-off which would result in crude prices reaching $20 a barrel level soon. The two shocks involve the impact of demand from coronavirus and pressure of oversupplies from the announcements made by the words largest oil producer Saudi Arabia.
“What still has to become clear is what do crude oil exporters do in response to the Saudi action, beyond the short-term move of also cutting prices? Also, will importers actually buy more crude, or switch their supplier mix in response to cheaper oil? The coronavirus is still hitting demand and it is likely that storage tanks will soon be filling up, with only China likely in a situation where it can meaningfully add to its strategic inventories,” the brokerage firm has said in its analysis.
Hell broke over the weekend as oil prices plunged by 25 per cent in single trading session after OPEC and Russia started an outright oil price war which leading to the biggest percentage drop since January 17, 1991, at start of first Gulf War and lowest price since February 12, 2016.
After the talks between the two (OPEC and Russia) for extension of a possible production cut collapsed, crude oil touched $30 from $45 a barrel earlier only to recover marginally to a level of $35 a barrel now.
Prices were already under pressure before the OPEC+ alliance appeared to fall apart, with demand fears pushing both grades into bear market territory earlier this year. The prospect of another price war is spooking traders who will remember the crash that began in 2014, when an explosion in US shale production prompted OPEC to open the spigots in an attempt to suppress prices and curtail shale output.
“That strategy ended in failure, with shale producers proving too resilient and Brent crude tumbling below $30 a barrel in 2016 amid a global glut. It was that crash that prompted OPEC to club together with Russia and others to curtail output and help shore up their oil-dependent economies,” Motilal Osawal said in its report.
The brokerage firm has said that if Russia’s plan (not to effect a production cut) is to try to kill the US shale industry, it should be prepared to sustain it for a long and painful haul. The crash in oil prices that began in late 2014 did ultimately result in hundreds of shale producers declaring Chapter 11 bankruptcy, but the net result of that process is that most of those companies reorganize themselves and come back with far less debt load.
The strategy also fails to recognize that most producers have already put hedges in place for most of their equity production through the remainder of 2020 and beyond. While Russia would also be impacted by a significant decline in oil prices, it appears to have some room to manoeuvre before it feels the pain. Saudi Arabia needs a price of about $83 to balance its budget, while Russia only needs price of about $42. Meanwhile, shale oil producers spend more to extract oil and generally break even with an average price of $68 per barrel, the brokerage has said.
