1. In the last two weeks, oil prices have almost halved due to Coronavirus’ threat to the global economy and the decision of OPEC+ to no longer control oil prices. Here’s a thread of resources and other threads explaining what’s what
2. As of this morning, WTI is trading around $32/barrel, >20% lower than Friday and the lowest price since 2016, as well near lows from the depths of the Great Recession and the early 2000’s.
Brent, the international benchmark, is not far off. (WTI, source EIA)
Brent, the international benchmark, is not far off. (WTI, source EIA)
3. The short explanation is soaring US shale production challenged Russia and Saudi Arabia, who collaborated to constrain supply to keep prices high.
After years of losing market share, they stopped that collaboration. This thread goes into depth
After years of losing market share, they stopped that collaboration. This thread goes into depth
4. One estimate last night from Goldman Sachs estimated that Brent oil, NOT WTI, could dip as low as $20/barrel.
This is a feasible projection, especially as hedged production means that a halt in drilling or shut-ins may not occur quickly enough bloomberg.com/news/articles/…
This is a feasible projection, especially as hedged production means that a halt in drilling or shut-ins may not occur quickly enough bloomberg.com/news/articles/…
5. Beyond the collapse of the Saudi-Russian deal, the proximate factors for low prices are the effect of Coronavirus on oil demand and economic demand more broadly, pre-covid19 slack in global oil demand growth, and ample global supply
6. Coronavirus impacts the whole energy economy.
@CSISEnergy has a good round up from experts, including this for oil: “we could be facing a demand profile that looks a bit like a hybrid of the SARS experience of 2003 and the financial crisis of 2008” csis.org/analysis/exper…
@CSISEnergy has a good round up from experts, including this for oil: “we could be facing a demand profile that looks a bit like a hybrid of the SARS experience of 2003 and the financial crisis of 2008” csis.org/analysis/exper…
7. Critically, the nature of the Coronavirus economic contagion makes oil markets particularly vulnerable to “much lower for much longer.”
Demand will not be as price-responsive as normal
Demand will not be as price-responsive as normal
8. A key thing to figure out is to what degree Russia and Saudi Arabia pursue this strategy long term and whether they restart supply control negotiations.
Despite some claims that Russia is trying to hurt US producers, this is not immediately clear
Despite some claims that Russia is trying to hurt US producers, this is not immediately clear
9. In part, its worth reevaluating Russia and Saudi Arabia as competitors to US shale alone. This reply and related tweets explores the idea that this is about global supply and price competition more so than targeting US producers specifically
10. The geopolitics are important to figuring out how long this lasts. Meanwhile, the economic impact of low oil prices will hit energy producing regions particularly hard.
If there is a global recession, those regions may be the first to face it.
If there is a global recession, those regions may be the first to face it.
11. Unless OPEC+ reinstitutes supply control, a lot of mid-size companies may not escape this without debt defaults, bankruptcy, or being acquired.
Many were planning for higher (though historically moderate) oil prices and were already on shaky ground
Many were planning for higher (though historically moderate) oil prices and were already on shaky ground
12. In other especially rosy estimates for oil prices, here’s one from an oil major just last week.
13. The economic and financial impacts will not be limited to the oil sector.
14. What such low prices mean for the economies of oil export dependent countries is not good. Really not good, especially where oil revenues help fund health systems that need to fight Coronavirus tribuneonlineng.com/more-trouble-f…
15. This price collapse is not a sign of an inflection point in the oil industry that signals peak oil demand, a fall in emissions, or the collapse of oil companies. Low oil prices will make clean energy less economically attractive
16. On that last point, two notes about how oil’s collapse will impact clean energy. Whatever economic advantage there was to EVs is now very small or gone. Gasoline prices will be sub-$2/gallon and could even approach $1/gallon. Policy will matter
17. Second, the oil price collapse will impact natural gas prices. Yes, oil is not used heavily in US electricity markets, or even globally anymore. Natural gas, however, is, and is often the marginal fuel in wholesale markets
18. Regional natural gas prices and global LNG prices have been weak for months. The collapse in oil and falling demand has driven declines in LNG prices.
In the US, LNG is now a primary source of NG demand growth, meaning a direct causal link from oil=>LNG=>domestic prices
In the US, LNG is now a primary source of NG demand growth, meaning a direct causal link from oil=>LNG=>domestic prices
19. Which is why US Henry Hub natural gas prices are trading at only ~$1.70/mmbtu front-month this morning, the lowest since 2016. It’s the end of winter, so its low, but it may not strengthen much this summer, driving further coal and nuclear retirements, and reducing RE build
20. As a final note, there is a lot of uncertainty regarding oil prices moving forward. If OPEC+ renegotiates or if the economic impact of Coronavirus is less than expected, oil could be back to the mid-$40's or mid-$50's. Alternatively, we may have sub-$40/barrel oil for a while
21. TL:DR: intense oil supply competition and the Coronavirus’ impact on transportation and broader economy could lead to sustained oil prices not seen since the 1990’s. Many people may lose jobs, consumer benefits may be limited, and the climate is still in peril in the long run
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