OIL SECTOR continues to fall as Saudis ramp up production; Abu Dhabi set to follow suit.
Crude hit by pandemic declaration, Saudi output bump
Oil resumed its slide alongside equities Wednesday after Saudi Arabia said that it would raise its production capacity and the World Health Organization declared the coronavirus a pandemic.
Futures declined 4% in New York. The battle for market share intensified as Saudi Aramco announced plans to increase its oil production capacity to 13 million barrels a day and Abu Dhabi National Oil Co. vowed to pump as much as possible next month. Meanwhile, the World Health Organization declared the virus a pandemic, sending the Dow Jones Industrial Average into a bear market, ending the longest bull run in the history of American equities.
West Texas Intermediate crude for April delivery lost $1.38 to settle at $32.98 a barrel on the New York Mercantile Exchange.
Brent crude for May settlement fell 3.8%, or $1.43 cents, to settle at $35.79 a barrel on the London-based ICE Futures Europe exchange, putting its premium over West Texas Intermediate for the same contract at $2.40.
The oil market’s bearishness was reflected in the nearest time spread for the global Brent benchmark, which signaled oversupply. The marker is at its weakest since 2016, creating incentive for traders to book tankers to store oil they can sell later at a profit.
Earnings for supertankers on the benchmark route from the Middle East to China have jumped to $166,147 a day — a 137% increase from Tuesday, Baltic Exchange data shows. That compares with $30,339 a day on Friday.
Until this week, those earnings were down by about 70% this year as a result of the virus. They started to rebound on Monday after the breakdown of talks last week between OPEC and its allied producers, particularly Russia.
In what appears to be more jousting with Russia, Saudi Aramco, the national oil company of Saudi Arabia, said Wednesday that it had been directed by the country’s ministry of energy to increase its oil output capacity to 13 million barrels a day from the current 12 million barrels a day.
“The challenge for oil market at large is that OPEC has gone back to its plan of managing its own market share rather than stabilizing prices,” said Rob Haworth,
senior investment strategist at U.S. Bank Wealth Management in Seattle. “The big question is who blinks first. We also don’t know what’s going to happen with this virus. The market’s fear of diminished demand growth is very real.”
The disintegration of the coalition between OPEC and allied producers last week rattled an already fragile market that is in the midst of grappling with the coronavirus wreaking havoc on global economies. The crisis has prompted global policymakers to either deliver or signal stimulus measures to stem the economic blow from the outbreak.
In the U.S., Republican senators said they are considering options for ways the federal government can aid oil drillers including purchasing low-priced oil for the Strategic Petroleum Reserve, the nation’s emergency cache of hundreds of millions of barrels of oil, according to Sen. Lisa Murkowski of Alaska.
During the collapse in prices and the coronavirus obliterating global demand, the Energy Information Administration cut its demand outlook for petroleum and liquids fuel by 900,000 barrels for the first quarter.
The U.S. Energy Department also said U.S. oil output will average 12.7 million barrels a day in 2021, marking the first year-on-year decline since 2016.
The U.S. in recent months began exporting more petroleum than it imports, a shift fueled by record shale production in fields such as the Permian Basin. Now, in the worst price rout in nearly three decades, American drillers are facing a millionbarrel drop in production that could curb U.S. exports and set back the country’s march toward energy independence.
“The U.S.’s net exporter days may be numbered,” said Cailin Birch, a global economist at the Economist Intelligence Unit in London.
Tumbling oil prices around the world are shining a light on the U.S. shale producers that are most at risk because of heavy debt loads.
“I wouldn’t be surprised to see 55 to 60 bankruptcies” this year, compared with 50 last year, said Raoul Nowitz, managing director of restructuring and distressed asset support services at Solic Capital. That number may grow if the price slump persists for an extended period, he said.
For now, there has been one upside for the U.S.: low gasoline prices. “Good for the consumer,” President Donald Trump tweeted Monday. “Gasoline prices coming down!”
But cheap gasoline might not be a boon for American motorists who are scaling back on travel plans as the coronavirus spreads. And the same dynamic will be at play for refineries: They normally would benefit from lower prices for the oil they use to make gasoline, diesel and jet fuel, but now they’re up against a virus-spurred drop in demand.
“Low crude oil prices now seem more likely to hurt the U.S. economy than to help it,” Kevin Book, managing director of research firm ClearView Energy Partners. Falling oil “prices seem unlikely to fatten refiner profit margins, because coronavirus continues to suppress transportation fuels demand.”
On the regulation front, Trump has delivered as his administration eased rules governing hydraulic fracturing on federal land and limiting air pollution from wells. And Energy Department officials have gone on diplomatic missions to sell American energy to Europe.
“Why would a voter view what happened as a failure if the Russians are saying that U.S. shale broke OPEC production cuts?” said Benjamin Salisbury, a senior policy analyst at Height Capital Markets. “Wouldn’t you say this is actually what energy dominance looks like?”