First oil

Not sending this issue off to the printer on time allows us to comment on one of the worst one-day declines in oil price history, as well as the worst one-day meltdown in the history of the New York Stock Exchange (NYSE)—both on March 9, and both related to Coronavirus. Back in November, no one had heard of this malady. But here we are now, with Coronavirus dominating the news worldwide and affecting the global E&P industry.

This virus seemingly popped up without warning in China and then spread around the world, albeit in uneven proportions and effects. But beyond the growing human toll, there has been an immense effect on global economic activity. Reduced manufacturing in China, and diminished activity in many other countries, has resulted in major demand destruction.

Accordingly, the WTI oil price dropped 11%, from $51.43/bbl on Feb. 24 to $45.90 on March 5, prompting the OPEC members to propose an additional production cut to the larger OPEC+ group, which includes Russia. However, on March 6, Russia walked out on those meetings, rejecting the proposal completely and vowing to produce more. 

In a tit-for-tat response, Saudi Arabia on March 8 announced $6-to-$8/bbl discounts to its selling prices for April, and then announced 12-MMbpd-plus output on March 10. Thus, the oil market cratered on March 9, with WTI on the New York Mercantile slumping to $31.13. The Dow Jones on the NYSE, in posting its worst day ever, dropped 2,018.43 points, to 23,846.35. On March 10, there was modest improvement to both prices.

It was unclear how long the markets would be in a lower range. Suffice to say, there will be new capex reductions by many operators globally, and activity will be down, accordingly. We will re-examine the situation in our April issue.

Copious irresponsibility everywhere. Meanwhile, never, in this editor’s many years in this industry, has there been such widespread irresponsibility coming from so many entities at one time. The most egregious irresponsibility was exhibited by Chinese officials, who allowed the Coronavirus pandemic to get out of hand so quickly, and who failed to timely notify other countries.

The behavior of Russia and Saudi Arabia, with regard to production levels and oil prices, is breathtakingly irresponsible. Then we have the outrageous behavior of some U.S. politicians, in both parties, who have used the Coronavirus to play political games. Finally, we have the national media’s needless panicking of the U.S. public about the virus. This has caused panic buying of certain anti-viral  and hygenic products across the country, on a level usually reserved for hurricanes.

This, too, will pass. We agree with API that Russia is trying to retaliate for sanctions, and both Russia and Saudi Arabia are trying to put a dent in U.S. shale output by crashing the oil market. But the global E&P community can take comfort from comments made by former U.S. Ambassador to Russia (Oct. 2017-Oct. 2019), Jon Huntsman, Jr., who is now running for governor of Utah. “…I’ve always argued that the greatest weapon we have against the Russians is our ability to be energy self-sufficient,” he told the Fox News Channel on March 9. Huntsman continued, “the ruble dropped 10%. For the Russians to make the numbers to pay their bills, oil has to be at least at $50.” Huntsman also noted that the Russians cannot afford for oil prices to stay low, because their economy relies completely on oil and gas exports and selling military hardware abroad.

Regardless, the world’s citizens, including the upstream industry, will get past this crisis. In just the last 40 years, the E&P industry has survived at least four major downturns in oil price and business levels—1982–1983; 1986–1989; 1998–1999; and 2008-2009. We will survive this one (which really dates back to 2014), too, with great technological prowess, sound business practices and the greatest, most dedicated workforce in the world.

About the Authors

Kurt Abraham

World Oil

Kurt Abraham kurt.abraham@worldoil.com