In a dramatic week for oil prices, with prices hitting negative territory for the first time in history and sending millions of barrels of oil into storage, market analysts have reflected on what this price slump might mean for the oil industry in the weeks and months ahead
Ole Hansen, Saxo Bank’s head of commodity strategy, said that last week’s price drop caught oil producers “off-guard” and they have “struggled to respond with corresponding production cuts”.
“Saudi Arabia’s very ill-timed decision to hike production was reversed within weeks when OPEC+ agreed to cut production during the Easter break by 9.7 million barrels/day, starting from May,” said Mr Hansen. “Global lockdowns have slowly begun to be get lifted but the process of returning to previous demand levels could take many months.”
He added that it will be “weeks, not months” before global oil storage facilities are at capacity, saying this has already happened at storage facilities located in and around Cushing, Oklahoma.
“The coronavirus outbreak, coupled with the slump in oil prices, has weakened the economic outlook for GCC countries,” said Mohammed Ali Londe, an AVP analyst at Moody’s Investors Service. “This will have adverse consequences for insurers, as demand for insurance falls.”
George Booth and Akshai Fofaria, partners and specialists in energy projects and transactions at Pinsent Masons, offered their analysis, saying oil at US$20-$30 a barrel is likely to damage a range of E&P businesses and warning managers not to make “rash decisions” to protect their businesses.
“Restructuring or insolvency may be inevitable for a large minority of businesses unless relationship banks are willing to provide forbearance. This may involve cutting budgets which cause the breach of fundamental license obligations, compromise the safety of operations or generate environmental risks. Managers may also be tempted to take credit from suppliers knowing they cannot be repaid, or to misstate financials in order to obtain forbearance from banks or other creditors,” the analysts said.
“Stronger E&P companies biding their time before picking off cheap assets during this period of distress should be alert to the potential ‘corrosion’ risks to target assets if they leave it too long before making an offer. One cannot escape the possibility that there may be increasing incentives to hide damaging issues from potential buyers the longer this crisis continues.”
Financial problems can also have knock-on effects, such as the termination of license agreements and triggering defaults under joint operating agreements and agreements with suppliers, they cautioned.
“It is less well understood that in many jurisdictions, particularly in the Middle East, Africa and South Asia, licences – or licence interest documentation – may be imperilled, even if only one member of an unincorporated contractor association is insolvent. If only one joint venture partner, which need not be the operator, falls into distress, then the host state may have the opportunity to terminate licence arrangements for all joint venture partners. It is critical that E&P companies audit their licence arrangements and institute precautionary measures to guard against the insolvency of one of their joint venture partners should this seem likely,” the analysts concluded.
