KUALA LUMPUR: Schroders expects the oil price collapse, aggravated by demand destruction due to the Covid-19 pandemic, to cause many oil companies in the US, Asia, Latin America and Europe, to go bankrupt.
Its head of commodities Mark Lacey said on Wednesday despite many oil companies cutting capital expenditure by up to 50%, many, many companies are going to go bankrupt.
He cited that around 80 oil and gas companies filed for bankruptcy in the 2015 sell-off.
“The current situation is far worse than 2015, so the industry is going to look very different after this wash out. These bankruptcies will not be limited to the US, but will also likely occur in Asia, Latin America and Europe.
“At current prices, many oil companies around the world are starting to ‘shut-in’ production. This is when they put a cap on production that’s lower than the potential available output, ” he said.
Lacey said at the start of March, the shut-ins were gradual but they are now accelerating and a lot of these will be permanent, with many fields potentially not restarting even if prices recover back to US$60-US$65 per barrel.
“Industry research suggests that as much as four million to seven million barrels a day could be permanently lost as a result of these shut-ins, ” he added.
To recap, the price of West Texas Intermediate (WTI), the grade of crude oil used as a benchmark, turned negative for the first time ever on Monday.
WTI for May delivery closed at -$37.63 a barrel. It started the day at US$17.73 and touched an intraday low of -US$40.32.
Lacey pointed out due to the unprecedented event, oil producers had to pay buyers to take the commodity off their hands due to fears that storage capacity could run out.
He explained Monday’s price action was the result of physical traders that had committed to taking delivery in Oklahoma not being able to store the crude, to the point that they had to pay storage holders one-off payments of between US$40 per barrel and US$50 per barrel to hold the crude for a few days.
“I would expect the June and possibly July WTI contract to remain extremely volatile over the next few weeks as full storage in Oklahoma is unavoidable, ” he said.
However, he pointed out this is not specific to the US market. Around the world, storage terminals will fill up and this will force even bigger cuts from Opec and non-Opec producers.
“The shock to the global oil market as result of Covid-19 restrictions is unprecedented. The oil market has never experienced a fall in demand of this magnitude.
“From what we are already seeing, this will have a long-term impact on the supply dynamics of the oil industry for many years to come. And despite recent cuts to production, the most important driver for any recovery will be demand, ” Lacey said.
Schroders’ chief economist & strategist, Keith Wade said under normal circumstances, lower oil prices help households by pushing down inflation and boosting spending power.
“At the moment though that’s not happening as people aren’t driving and most retailers are shut for the lockdown. So there is little opportunity to receive the benefit and spend more elsewhere.
“Once the lockdown is lifted there would be an opportunity to spend, but demand for oil and fuel prices will also rise at that time so it’s hard to quantify. On balance I would see this effect as a minor positive for most oil consumers.
“However, there is a significant negative as oil producers have to cut back on production to match demand and financing costs have risen steeply for the sector. Shale gas producers are already cutting their capital investment and this will drag on activity and deepen the recession in the US before any consumer benefits come through, ” Wade added.
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