Monday, 09 March 2020 05:20

Oil market collapse

Today the oil price on the Asian markets has, for the first time, fallen by more than 31% at the beginning of trading on Monday. This happened after OPEC countries failed to agree with other oil producers on Friday (as is reported, Russia refused to approve this much deeper decline of production) to reduce production, and the market is returning to its natural state –a total oversupply of oil due to the falling demand caused by the epidemy, as well as competition with other energy carriers.

OPEC offered to extend the current agreement on reducing oil production (by 2.1 million barrels compared to 2016) until the end of the year and further reduce production by 1.5 million barrels per day in the second quarter of 2020. Saudi Arabia, the largest oil producer and the member of OPEC, announced about reduction in official prices, then the cost of Brent fell to $31 per barrel, Bloomberg reports.

Now, the cartel will not only be unable to compensate the decline in demand due to the coronavirus, but there is also uncertainty about whether the current reduction in production will continue until the end of March.

It should be noted that on March 6 prices for WTI and Brent crude oil already fell by more than 7% compared to the closing levels on March 5, reaching multi-year lows, OGJ reports.

The futures contracts for Brent crude oil for delivery in May were last considered at $ 46.53, while WTI contracts for April were considered at $42.61 per barrel.

It should be noted (as Caspian Energy previously wrote with reference to the London weekly Sunday Times ) that the peak of production of "cheap" oil in the world was reached in 2015, after which a steady decline in its production will begin ( a report by experts of the British research organization Peak Oil Group).

The report noted that cheap oil - which production cost is below $25 per barrel - ended globally in 2005. 

Thus, the situation in the industry today again repeats the crisis of 2015 and is similar to the period of 1998-99, when prices on world markets fell to $8-10 per barrel.

This crisis then gave rise to a series of merging and absorption mainly of companies whose assets were concentrated mainly in the upstream sector -Amoco, Unocal, Elf Aquitain, Fina, Pennzoil, Texaco, and Mobil. The past crisis then became the starting point for the subsequent prosperity of vertically integrated majors, of which only 7 remain today.

And, today, when the focus in the global oil and gas industry is shifting from oil to natural gas and its derivatives, we can see a recurrence of the situation in the late 90's, when oil and gas companies can begin to refuse to invest in new projects.

While in 2015, according to Wood Mackenzie, oil companies already canceled 68 exploration and production projects for a total amount of $380 billion. It was a deepwater drilling sector which had the hardest impact then. Such projects are the most expensive, therefore oil and gas giants refuse them first.

In 2015, oil companies postponed most of the projects till 2020, hoping that by this time the price of oil will significantly increase. During that year the number of canceled projects increased by one third, the survey showed.

The result of the increased frequency of oil crises will be the growth of new technologies that will change the petrochemical industry beyond recognition in two decades, and solar energy will become so efficient and cheap that it will be unprofitable to build new power plants using fossil fuels, Bloomberg wrote during the 2016 crisis on basis of the strategic World Energy Outlook 2040. By 2026, industrial solar energy will be competitive in most markets (we see this already today), and will make it unprofitable not only to build traditional power units, but also to operate existing ones (Comment. Caspian Energy 2015).




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