Price war sends oil plunging amid virus selloff

  • New York Stock Exchange Floor Governor Brendan Connolly, left, works with traders Peter Tuchman, John Panin and Sal Suarino, second left to right, on the floor on March 9. The Dow Jones Industrial Average plummeted more than 7 percent, following similar drops in Europe after a fight among major crude-producing countries jolted investors already on edge about the widening fallout from the outbreak of the new coronavirus. (Photo/Richard Drew/AP)

If oil company executives don’t get sick from the coronavirus, the feverish drop in prices is likely causing them aches, pains and chills anyway.

The good old days were not much more than two years ago when Brent crude, the global benchmark, was at $85 per barrel in October 2018, its highest point in six years. The bottom of the barrel started leaking and then completely fell out the past few days.

Brent lost almost 10 percent on March 6 and then went into a freefall on March 9, losing an additional 24 percent — its steepest one-day slide since 1991 — closing at less than $35.

The back-to-back days of double-digit drops are due to a progressive series of events: The economic hit from the coronavirus is reducing global demand for oil; the 3-year-old production-curbing deal between OPEC nations and Russia collapsed; and Saudi Arabia announced on March 8 it was boosting production and curbing prices, launching a price war with Russia.

The Saudis are cutting prices by $6 to $8 per barrel for sales to Europe, the Far East and the U.S. in an effort to entice refiners to buy their crude instead of other supplies.

“That’s the oil market equivalent of a declaration of war,” Bloomberg quoted a commodities hedge fund manager.

“Saudi Arabia is now really going into a full price war,” Iman Nasseri, managing director for the Middle East at oil consultant FGE, told Bloomberg.

Analysts see the Saudis wanting to inflict pain on Russia and other producers to bring them back to the negotiating table for production cuts.

Meanwhile, Alaska North Slope crude is no longer commanding the $10 premium to U.S. benchmark West Texas Intermediate that it earned in late 2018 and early 2019. As world prices tank they are taking Alaska crude along with it, and North Slope oil is back around its more traditional $2 or $3 bump from WTI, which closed March 9 at about $31 per barrel.

Alaska crude generally competes on the West Coast against foreign imports, not U.S. oil, due to the lack of pipelines to deliver the bounty of mid-continent shale over the Rockies to the coast.

If the steep fall in prices holds throughout the year, the state of Alaska could lose out on several hundred million dollars of tax and royalty revenues.

But there’s not much Alaska can do about it. Prices will depend mostly on Russia, OPEC, the coronavirus and its hit to the global economy.

Moscow last week rejected a Saudi Arabia-led proposal to impose cuts of an additional 1.5 million barrels per day on the so-called OPEC+ member nations, on top of the current reduction of 2.1 million barrels per day that is due to expire at the end of March.

The combined cutback would have taken about 3.6 percent of the world’s oil supply offline.

Russia has less of an incentive to cut production to boost prices as its economy is more diversified and its treasury can get by on $50 oil, whereas the Saudis need significantly higher prices to cover their government spending.

In response to Russia’s refusal to join the effort to further limit production, OPEC refused to extend the existing cuts past March 31.

“We are in another period of true turmoil,” said Daniel Yergin, vice chairman of global energy analytics firm IHS Markit. Deciding whether and how much to cut supply during the coronavirus virus “really splintered the (OPEC+) alliance,” he said in a CNBC interview March 9.

“This is an unexpected development that falls far below our worst-case scenario and will create one of the most severe oil-price crises in history,” Bjoernar Tonhaugen of Rystad Energy, was quoted by Reuters.

“This is going to get nasty,” Doug King, a hedge fund investor who co-founded the Merchant Commodity Fund, told Bloomberg. “OPEC+ is going to pump more, and the world is facing a demand shock. $30 oil is possible.”

But why stop the depressing predictions at $30 oil?

“We’re likely to see the lowest oil prices of the last 20 years in the next quarter,” Roger Diwan, an oil analyst at consultant IHS Markit and a veteran OPEC watcher, told Bloomberg. It was just more than 20 years ago that Brent last fell to less than $20 per barrel.

Though Russia did not signal any reconciliation, OPEC said it is willing to talk.

“Hopefully they’ll come back,” said Suhail Al Mazrouei, United Arab Emirates’ energy minister.

Adding to the supply-and-demand imbalance are continuing gains in U.S. oil output. Annual production in the U.S. set another record in 2019, surpassing 12 million barrels per day for the first time, a gain of 10 percent over 2018. U.S. output has more than doubled since the fall of 2012, due to booming shale production.

The U.S. Energy Information Administration predicts 2020 will average more than 13 million barrels per day and more than 13.5 million in 2021.

All that oil would be good if the world needed it, but that’s not the case. Goldman Sachs said last week.

Goldman Sachs is the first major Wall Street bank to forecast that overall global demand will contract this year. Oil-market consultants Facts Global Energy and IHS Markit published similar warnings.

It’s not that the decline forecasts are large: 150,000 barrels a day at Goldman and 220,000 barrels a day at FGE. But if it’s true, it would be only the fourth time in the past 40 years that demand has fallen from one year to the next. Goldman Sachs predicted demand will fall 2.1 million barrels a day in the first half of 2020, recovering somewhat in the second half.

The price crash, however, may help stem the growth of U.S. oil production, as investors are increasingly reluctant to write checks. North American oil and gas producers have an estimated $86 billion of rated debt maturing in the next four years, according to Moody’s Investors Service, debt that will be harder to pay off or refinance at low prices — and harder to raise money for new developments.

Still, there’s no shortage of opportunities in U.S. shale plays. Chevron on March 3 upped its Permian Basin resource estimate to more than 21 billion barrels of oil equivalent, more than double its estimate of just three years ago.

Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide. He is the Atwood Chair of Journalism at the University of Alaska Anchorage School of Journalism and Public Communication.

03/10/2020 - 8:26am