I am sure most with interest know there are varied prices for different baskets: WTI for the US, Brent Crude for the North Sea and OPEC reference basket for OPEC of course.
It is obvious that with West Texas Intermediate (WTI) heading to $1 then the shit is real (pardon my French). I would not be too bothered about the forward contracts that went into -$30, yet!
The real worry will come if the effective demand of the world is not stimulated soon enough. Give or take May/June ends.
One good reason for that is you wouldn’t then have enough storage for crude and with shippers charging $350,000 per day it will be a tall order to keep the books off RED. Also, with ongoing contracts, I will call this, “The twin disaster scenario”. We will hope shippers will waiver cos it’s not like there’s any business anywhere else but remember they’ve been in this situation before in 2015/16. It’s actually worse this time.
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Why? Because this time, industries are down hence the demand for your crude is nowhere. So, what a lot of producers will do is to store the crude in Very Large Crude Carrier (VLCC) and patrol the seas for buyers at maximum discounts.
This scenario that makes producers desperate is already here with reported discounts ranging from $5 to $10. Companies are forced to do a cost-benefit analysis. What is the cost of shutting down operations Vs giving the demurrage charges to shippers for holding my crude or giving some token to my buyers for off taking my crude?
There is a massive variable at play here and that is the implication for the US as this will challenge their energy security. Shale producers are high-cost producers and will start to default on credit. The world economy cannot collapse. That’s Armageddon and it’s an election year and certainly, Trump certainly doesn’t want this. Hopefully!
True, US might be able to tap on its strategic reserves for the shortfall but that’s not what you want to do from a political standpoint. Trump might be forced to wield global might. Whether it be in the form of intervention for the shale producers to keep producing at a higher cost.
Almost all Shale crude is consumed by the US and if that is done then there will be chaos and it would also make the US a hypocrite, guilty of what it usually accuses China of and Russia would then have been right not to have agreed to the earlier pact to cut production.
Closer to home the new cut from OPEC+ isn’t enough to drive demand at the moment. There is a huge glut in the market. When the 2nd and 3rd largest producers decided to open up their taps to the maximum in market share war. The world is oversaturated in crude.
Now with the added variable of the coronavirus scenario, this is leaving a massive worry in planning as to when economies will start to recover.
One of the factors I’ve deliberated to consider for this (recovery) to happen in my scenario planning is first, the probability of the world public healthcare to contain this virus in the next two or three months, which will be a best-case scenario, plotting this against the effectiveness of intervention from the government of countries to their various industrial sectors to kickstart their economies.
In the worst-case scenario, GDP across the globe will just shrink and hence effective consumption power for industries which will invariably impact adversely on oil prices recovery.
Good luck 2020 with all the uncertainty
Masade, the staff of Eroton Exploration & Production Company Ltd. He is also a member of the Nigerian Gas Association
