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Edward Bell - Commodity Analyst
Published Date: 29 March 2020
Oil markets have now moved into complete dysfunction with prices for physical barrels threatening to go negative. WTI priced at Midland, a production centre in Texas, closed last week at just USD 13/b while West Canada Select, a benchmark for production in Alberta, settled barely above USD 5/b. The possibility of negative prices in the physical market which we alluded to last week looks highly plausible in the current maelstrom. As for benchmark futures, well at least they stopped declining by double digits: Brent futures closed down 7.6% to end the week at USD 24.93/b while WTI settled at USD 21.51/b, down 4.1%.
Saudi Arabia’s energy ministry was unequivocal about not backing down in its oil market stance. A statement from the ministry said there had been “no contacts” between Saudi Arabia and Russia, with no “discussion of a joint agreement to balance oil markets.” Past rounds of price-war/market-share strategies have lasted months, not weeks, and we see no sign of the Saudi posture easing any time soon. The Kingdom gave no reply to calls from US Secretary of State Mike Pompeo to help settle oil markets, nor was energy part of the G20 communique from a virtual meeting chaired by Saudi Arabia at the end of last week.
Even if there was some diplomatic breakthrough, the scale of production adjustment required would be hard to fathom. The IEA’s secretary general estimates that with 3bn people around the world in lockdown oil consumption may be declining by 20m b/d. For reference, Saudi Arabia and Russia’s combined oil production February was 21m b/d. Oil production from OPEC and Russia would need to fall by roughly half to stop an unprecedented accumulation of inventories.
Beyond prices, the carnage wrought by the oil price war is showing up now more prominently in the US drilling rig count. E&P companies in the US took 40 rigs out of work last week, the largest single week decline since Q2 2015, the height of the last price-war strategy adopted by OPEC. In the Permian basin 23 rigs were taken out of service while the Canadian rig count fell by almost half to just 54.
Time spreads have worsened beyond the 2015-16 price crash with front month spreads in WTI at USD 3.64/b in contango compared with a trough of USD 2.62/b in Feb 2016. Brent time spreads have performed worse than during 2015-16, closing last week in the 1-2 month contracts at USD 3.02/b, just wider than the USD 3/b recorded in April 2015. Dubai time spreads are touching up against USD 5/b in the 1-3 month spread even as Dubai continues to hold a premium over both Brent and WTI.
Source: Bloomberg, Emirates NBD Research
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