Oil prices have been crushed by the combination of the novel coronavirus and an oil war between Russia and Saudi Arabia.
Last Friday, West Texas Intermediate (WTI) briefly traded below $20 bbl – a price not seen since February 2002, only a few months after 9/11 ripped apart the world’s economy. Yes, we have dealt with low oil prices before, but nothing like right now. The drop in WTI, from immediately prior to the OPEC meetings in Vienna on March 5-6 to last Friday, was a whopping 53% in just 10 trading days. That ranks as possibly the fastest oil price decline ever, certainly in modern times.
How long will oil prices stay in the $20-bbl range? Since no one knows the answer to this we must assume it will be the foreseeable future. As boxer Mike Tyson once said, “Everyone has a plan ‘till they get punched in the mouth.” The oil business certainly got punched. Now what?
It isn’t just the oil price punch. It’s also the shock of governments’ actions in response to the coronavirus pandemic. Shelter-in-place orders and the mandatory shutting down of non-essential businesses have created a surreal world. Never have we had a mandated recession, which is rapidly threatening to become a depression, as people lose their jobs, with no way to replace lost incomes. This isn’t the dust bowl of the 1920s, because then people could pack up and leave. Now you can’t leave your home, either here or in many countries around the world.
The oil industry is responding as expected. It’s cutting spending and downsizing. The human suffering from downsizing is painful. However, human suffering also comes with capex cuts. It merely becomes the workers of service companies and vendors.
There is no sugarcoating the outcome. Rigs and boats will go idle, and seamen and drillers will lose their jobs. Contracts will be terminated or adjusted. In most cases, it will be for projects about to start rather than ones underway. Of course, that is not a given, as some producers are overloaded with debt and working on marginal cash flows that are now trickles of their former flows. Those companies are at risk of a total collapse.
If Covid-19 is controlled fairly quickly, global economic activity will rebound and boost oil demand in the second half of 2020. Increased oil use will help moderate the Russia-Saudi Arabia battle. Those parties need to reach a compromise, but that likely depends on when and how sharply U.S. shale oil output falls. Will a recovery push the oil price up to where it was? Maybe.
For the offshore industry, operators’ exploration and development cost improvements will drive activity. To date, savings appear to be meaningful. But at $20 bbl, even the amazing ExxonMobil–Hess Guyana development is under water costwise.
The steel and character of those who built the offshore business has been perpetuated in those operating it today. Tough times will be mastered by the tough people of the offshore service industry.