Oil Goes Under: What Next?

Caixin Global Webinar - Cornavirus Series IV

Thursday April 23, 20:00-21:00 Beijing Time

Key points by Roger Diwan, Vice President, Financial Services, IHS Markit

 Global demand collapsed

• The market is faced with the biggest demand crash ever in history, which fueled the world’s largest ever global oil surplus.

• 95% of global demand remains under major movement restrictions.

• Broad based declines, but US and EU hit hardest.

• US oil demand at lowest level since 1969.

Little crude storage capacity

• No access to market or storage globally.

• Producers will shut in.

Trend in the future

• Major oil producers’ supply curtailment helps tighten market in 2020H2.

• In the short term, distress still remains, as forward price curves show.

• Buyers will defer most projects in 2020 and 2021.

• Final investment decisions will also see a collapse in 2020.

Shale gas

• A large portion of the gas produced in the US is associated with oil.

• Fast decline of the oil production leads to less associated gas volume.

• A tighter gas situation will increase gas prices in by next winter.

• The faster US oil production declines, the more bullish it will be for gas market.

OPEC

• The enforcement has long been the issue for OPEC and major non-OPEC countries (Russia).

• Everyone has to comply and probably over comply this time, because there are no buyers.

• The importance of the agreement is that it's set a new baseline for Russia and Saudi Arabia at parity.

• Geo-strategically at what price productions come back becomes very important, which allows the US production to restart.

Green/alternative energy

• The point is whether and how much green energy will be included in the stimulus programs.

• How to balance between economic stimulus and carbon footprint reduction?

• The debates exist in the US and Europe, and between Republicans and Democrats within the US.

What’s next

• Depends on how we get out of this situation: will the virus come back or not?

• A moderately optimistic view: we might have other breaks but managed with the help of technology in the coming fall and winter.

• We could have Brent back close to $40 by the end of the year.

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Key points by Lu Ruquan, Director of International Department, China National Petroleum Corporation (CNPC)

 Four stages of the recent oil price rout

• Broke out stage (Jan 2020): Oil price begin to tumble to around $50 per barrel as the market is pessimistic.

• Price/Market share war (Early March): Production cuts negotiations between the OPEC+ nations failed. The OPEC+ then started a price/market share war, driving the oil price to $40s and even $30s.

• Pandemic stage (Mid-March): As the Covid-19 spreads around the world, oil price fell below $20, and in extreme scenarios, oil futures price fell to negative.

• Return to “market management”: OPEC and other oil exporters reached consensus and cut production. However, oil price has not yet responded, since the market is very pessimistic on the demand side.

On Saudi Arabia

• For Saudi Arabia, the political issue is much more important than the economic issues.

• The Saudi is concerned about its security situation, therefore decided to react drastically, to contain rivals such as Iran.

On Russia

• For Russia, economic issues are more important instead.

• Russia consciously launched a price war to squeeze shale oil players out and seize more market share.

On the U.S.

• Economic factors and the reelection are the top priority.

• The U.S. exploration & production (E&P) companies are protected from impact in 2020, but might face difficulties in 2021, when debt payments are due.

What’s next

• The key is “oil power”.

• The “10 million barrel per day club” members, the U.S., Saudi Arabia and Russia, are competing against each other for oil power, which will also affect other nation’s energy security and national security.

• Competition and cooperation between these major players will determine the future trend of oil prices.

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Key points by Yan Jiantao, Vice President and Chief Strategy Officer, OilChem

Shanghai crude futures

• The oil price collapse caught many off guard in China. Shanghai crude futures are one of the options available.

• Since March 2018, China's Shanghai crude futures have performed far beyond the market expectations in terms of trading volume, open interest as well as the number of investors both in and outside China.

• Shanghai crude futures are highly correlated with WTI and Brent.

Strategies for investors

• Look at Shanghai crude futures, because it is the most regulated with relatively lower fees to invest.

• Look at global equities, oil related stocks in particular. Refiners would be worth looking into, but be very cautious to look at upstream players.

Transformation by economic recession and falling oil demand

• Global markets are now more and more driven by consumption.

• Roughly 60% of global oil demand goes to the transportation sector. China, roughly 50% and in the U.S. roughly 70% are about transportation.

• More and more oil demand going towards chemicals, medicine, new plastics, materials. Those demands currently only account for roughly 15% to 20%.

New normal coming up

• What happened in 2014 is that there were four crowding-out factors: over-capacity; excess capital, in particular in the U.S.; low-margin, low capital return projects; inventory.

• The oil industry only did well to some extent on one factor, dropping low-return projects. The other three factors were largely untouched.

• Oil price will stay lower for longer.

China Reform and Opening

• There is global sentiment against trade and against collaboration among nations.

• The Chinese government is making huge efforts to push forward financial opening up.

• It’s a daring step by the Chinese government, as is opening Shanghai crude futures to international investors.

Green & alternative energy

• New energy is definitely suffering and to some extent ignored by people and by the government.

• The industry is adjusting itself very well and sustaining in a very low oil price environment.

• New energy is poised to bounce back very quickly once the oil price recovers.

What’s next

• The oil price for Brent should overshoot, maybe all the way to $15 per barrel. Otherwise, there's always a lingering doubt.

• For the price at the end of the year, we’re looking at $30 plus per barrel. But if you look at the history, oil prices have hardly stayed in between $30 and $40 per barrel. In the longer term, we always look at $55 per barrel for everybody to feel comfortable.