Oil and LNG producers are bracing for several more months of depressed prices after a historic deal struck by OPEC and its allies to cut supply put an end to a brutal price war but looks set to only partly offset the enormous hit to demand caused by COVID-19.
The agreement comes ahead of the first quarterly reports from Australia’s oil and gas producers to be released this week, which will start to show the hit from the plunge in prices by more than a half so far this year.
After marathon discussions lasting over Thursday-Sunday, OPEC and Russia eventually agreed to reduce supply by 9.7 million barrels a day in May and June, with smaller reductions through to April 2022.
“The big Oil Deal with OPEC Plus is done,” tweeted US President Donald Trump, who helped broker the truce between Russia and OPEC’s de facto leader Saudi Arabia.
“This will save hundreds of thousands of energy jobs in the United States.”
Crude prices moved indecisively on Monday as investors pondered the deal by the OPEC+ alliance, which is supposed to be accompanied by additional cuts of 5 million barrels a day from non-OPEC countries such as the US, Canada and Brazil. Brent crude was about $US32.70 a barrel on Monday afternoon after swinging between about $US31 and $US33 the previous session.
Analysts warn supply reduction will only partly compensate for the reduction in global oil demand from the coronavirus pandemic that is expected to reach 20 million-30 million barrels a day this month. But they said that the deal should at least avoid a feared collapse of prices into the single-digit territory that would have risked disorderly shutdowns of fields and the market descending into chaos.
“Even though OPEC+ has decided to attempt to bail out the global oil market, the group has unfortunately only come up with half of the ransom money,” said Bjørnar Tonhaugen, head of oil markets at consultancy Rystad Energy, which estimates demand will be cut by 27 million barrels a day in April and 20 million bbl/day in May due to COVID-19.
He said the oil market would still see “enormous” increases in stockpiles in April and predicted oil prices would be under renewed downward pressure.
Australia’s oil and gas producers have already been digging in for a long haul on prices, after Brent crude hit 18-year lows in late March in the low $US20s a barrel, down from about $US67.70 at the start of the year. Woodside Petroleum, Santos and Oil Search have slashed capex budgets, delayed billions of dollars of new projects and cut contractor jobs as they also overhauled maintenance project plans to adhere to new physical distancing rules.
Oil Search last week tapped shareholders for $1.16 billion in fresh equity to beef up its balance sheet in the face of a prolonged oil price downturn. Share prices have already been savaged across the sector.
Senex Energy chief executive Ian Davies said he was expecting prices to remain soft in the short term, and probably into the medium term, given the supply cuts had “only done half the job” of compensating for the dive in oil use.
“Demand has fallen off a cliff,” Mr Davies said. “We’re planning for fairly soft prices for a while.”
The hit to revenues from the plunge in prices should start to show through in March-quarter reports, with Woodside first up on Thursday, followed by Oil Search and Santos next week. However, the lag of about three months for changes in crude prices to feed through into LNG contract prices means the more significant impact on LNG revenues will not be evident until the June quarter reports.
Meanwhile, the smaller producers such as Senex and Beach Energy that sell gas into the domestic market rather than LNG, are more protected but are still expected to see some impact.
“The energy majors generally have the strongest balance sheets, but will be hardest hit with most sales linked to oil pricing,” said Morgans analysts led by Peter Arden. “Many mid-tier producers will be sheltered by longer-term agreements for domestic supply, with pricing not typically linked to that of oil.”
Bernstein Research also said the OPEC+ deal wouldn’t be enough in the short term to avert a sharp increase in inventories this June quarter, which it said would test the limits of global storage capacity and could push spot prices back to $US20 a barrel or below.
The Bernstein analysts noted that the agreed cut was at the low end of the 10 million-15 million barrels a day that was mooted in the lead-up to the meeting and which was already viewed by many as insufficient to address the destruction of demand from coronavirus.
But the firm regarded positively the long-term commitment by OPEC+ to cuts, given the initial supply cut of 9.7 million bbl/d for May-June will extend for a further six months at 7.7 million bbl/day until the year-end, then for a further 16 months at 5.8 million bbl/d until the end of April 2022.
“The longer than expected duration of cuts to April 2022 is a signal that OPEC+ have not given up on supply-side price management with possibility of a strong price recovery once global demand returns,” the Bernstein analysts said.
Extracted from AFR