Despite Historic Production Cuts, Oil Is Dying

Let’s face it, oil is going to $15.

Every major and minor league oil producing nation has pledged to reduce its crude oil output, whether they’re a member of OPEC like Saudi Arabia, or not, like the Russians and the U.S. Yet, despite taking upwards of 20 million barrels of oil offline, oil continues to fall because China’s economy has gone from a projected 5% growth for the year, then a worse case scenario, to 1.2% now, based on the IMF’s latest projections. That’s a runaway train compared to other emerging market drivers of global growth. Brazil’s economy is said to contract by 5%, according to the IMF. This is about 480 basis points lower than what the market was forecasting for Brazil just two weeks ago.

The global pandemic, which started out of Hubei province in China, has crushed the world economy and not just because of the viral spread itself, but because governments around the world have demanded economies be shut down.

No one is flying. No one is driving. Factories in Europe, what’s left of them, are closed. Sao Paulo is basically closed. A turtle can now cross the LA Expressway and survive.

“OPEC+ has done its job,” says Naeem Aslam, chief market strategist for AvaTrade in London, who is working from home like nearly everyone in the markets these days. “It would be foolish to expect any more production cuts from Saudi Arabia or Russia.”

This weekend, Vladimir Putin said he would require the state-owned oil and gas giants to reduce production by even more than first agreed as his economy grinds to a halt on account of the new SARS coronavirus.

Russia was one of the first countries to ban all travel to China, but it did not ban travel to Europe, which became the new epicenter of the COVID-19 disease caused by the new SARS in late February. All hell has broken loose since.

“Ever since, I would say, the 30th of January until the 6th of March, our calls, our warnings were unheeded,” Saudi Arabia’s Energy Minister Abdulaziz bin Salman said on Mornings with Maria on Wednesday on the FOX Business Network. 

He said that he asked Russia and other OPEC members to cut again in late March. That’s when Russia rejected the deal and the Saudi’s said they would produce more to keep up with the Russians, crushing oil prices at the time. 

Crude oil is now trading at $19.49. This price level presents a significant threat to the U.S. shale oil industry. Two weeks ago, President Trump said he would buy their oil and store it in the strategic reserves. But now those reserves are full and oil tankers are being used to store oil, oil that can no longer find a home. Companies like Chesapeake Energy Corp
CHK are on their last legs. Their bonds trade in the single digits. A default is a matter of time.

So far, there has been no private equity players moving in to take over these companies at steep discounts. Industry consolidation might help oil prices find a floor. That, plus lockdown being lifted in Europe and in the U.S.

“In the absence of that, crude prices are likely to fall further, possibly reaching the $16 mark,” Aslam says.

The Saudi Energy Minister seemed confident in his interview with Maria Bartiromo today that the world’s oil producers will scale back, adding that its survival was necessary to many national economies. It creates high paying jobs, including blue collar jobs; it maintains economies of many rural parts of the country and it is a huge component to GDP growth for countries like Russia and Indonesia.

“We are all in dire need of maintaining our commitments,” Salman says. “None of us will gain if we don’t fulfill our commitment. We would not have signed up to do it if we had a tinge of concern that people would not. The energy sector has been hit the most by this disease. So when are you going to recover?” he asks, then answered himself with the obvious: only when mobility is returned.