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The damage from the oil war will ripple far and wide

July 11, 2020
in Oil Price
The damage from the oil war will ripple far and wide
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Latest Oil MArket NewsPosts

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In the meantime the effect of low oil prices will smash Team Australia’s LNG export revenues. Because gas export contracts are indexed to the price of oil, gas market experts EnergyQuest predict a bigger than $20 billion hit to LNG earnings next year.

Soft energy prices trigger a big brake on capex, opex, exploration and new projects. Which is unhelpful given we will need sustained multibillion-dollar investment over decades to rebuild energy systems and industries to manage the enduring long-term risk of climate change in a post-COVID-19 world.

So how and when this cycle of oil oversupply finally rebalances is of material importance to policymakers and business more broadly.

There is a surreal situation where hundreds of giant supertankers are sailing around the world trying to find someone to take their oil.

Accepting that predicting the future of oil markets is an uncertain art, three things are possible. First, energy prices may get lower before they recover. Second, the restoration of oil demand to pre-COVID-19 levels may be years away, if ever achieved.

Finally, the ultimate driver of oil market rebalancing will be the rate at which the global economy recovers from COVID-19. The longer it takes, the longer it takes.

Global oil demand has fallen by nearly 30 per cent since the start of the pandemic, as two-thirds of the world’s passenger aircraft were grounded and one-third of the world’s (mostly developed) population were placed under some sort of lockdown.

Just as COVID-19 is unprecedented, so too is the global response to it. The OPEC oil-producing nations could see signs of demand softening in early March, when the world’s biggest oil importer, China, started to turn tankers away because of the effect of its lockdowns.

When the Saudis tried to get agreement on a modest 1.5 per cent supply cut, the Russians refused. The Saudis retaliated by cutting the price of their exports. Oil prices began to collapse, followed soon after by global demand as the scale of COVID-19 hit home.

Deal to cut supply by 10pc

In early April OPEC and Russia made a price war-ending deal to cut oil supply by 10 per cent. It was the biggest production cut in oil history, and yet wasn’t big enough. Oil producers have been pumping 20 million barrels a day, more than the world can use.

This daily oversupply has continued and is now predicted to fill the world’s entire oil storage capacity in June, creating a surreal situation where hundreds of giant supertankers are sailing around the world trying to find someone to take their oil.

As we reach or approach this physical limit, this will force more aggressive shutdowns of oil producers around the world. High cost producers are more likely to shut down early, while those more proximate to markets may stay on.

The reluctance to switch off is because oil wells are easy to shut down but can be much harder, and more expensive, to restart. Some highly leveraged, unprofitable, higher cost US shale producers may be forced off and may not come back.

Before the collapse the United States was the world’s largest oil producer,…



Read More: The damage from the oil war will ripple far and wide

Tags: Damageoilripplewarwide

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