Domestic gasoline and diesel prices have fully entered the "5 yuan era". On March 20th, employees of a gas station in Xinle City, Hebei Province were refueling. Photo by Jia Minjie (Zhongjing Vision)
Influenced by multiple negative factors, international oil prices have plunged in succession in the past half month. The production of shale oil and gas companies with no financing is unsustainable and will usher in a wave of bankruptcy. The imbalance between supply and demand in the market will accelerate the shift of the focus of the international energy map, from the previous supply-side leading to the demand-side leading, that is, the international crude oil market will be transformed from the seller’s market to the buyer’s market.
Influenced by multiple negative factors, international oil prices have plunged in succession in the past half month. On March 18th, the New York Mercantile Exchange light crude oil futures for April delivery closed at $20.37 per barrel, while London Brent crude oil futures for May delivery closed at $24.88 per barrel. Compared with the beginning of this year, the prices of West Texas Intermediate crude oil and Brent crude oil both fell by more than 60%. The sharp drop in international oil prices may reshape the international energy landscape and accelerate the restructuring of the international energy landscape.
The imbalance between supply and demand of crude oil has intensified.
Nowadays, the basic balance between supply and demand to maintain the trend of international oil prices has been broken.
Look at the demand first. The COVID-19 epidemic has spread around the world, and many countries and regions have taken "hard core" measures to prevent and control it. A large number of international flights have been grounded, enterprises have stopped production, and global economic activities have slowed down significantly, which has seriously impacted the global oil demand. Analysts of Lyestad Energy Company lamented that the demand for aviation kerosene, gasoline, shipping oil, petrochemical products and power generation oil plummeted at the same time this year, "this is a rare bleak scene".
Bank of America predicts that global oil consumption will shrink to more than 500,000 barrels per day in the first half of this year. If the epidemic situation is not controlled, the shrinking demand may continue into the second half of this year. The head of global commodity research at Goldman Sachs Group pessimistically predicted that oil consumption would drop by 8 million barrels per day. The same view is held by Citibank, which predicts that the global oil demand will decrease by 4 million barrels per day in 2020, a record, and the oil demand in the second quarter will shrink to 11 million barrels per day.
Look at the supply. On March 6th, after the OPEC+Ministerial Meeting’s talks on production reduction broke down, Saudi Arabia announced that it would start to increase production substantially, and planned to increase production to 12 million barrels to 12.5 million barrels per day. Russia plans to increase production to 11 million barrels to 11.5 million barrels per day. In order to seize market share, Iraq, Nigeria, United Arab Emirates, Kuwait and other countries have also announced to join the army of increasing production.
On the one hand, demand has shrunk dramatically, on the other hand, supply has increased dramatically, the relationship between supply and demand has been completely unbalanced, and international oil prices have been diving. Many institutions predict that if the surplus crude oil cannot find a way out, the oil price may drop below $20 per barrel.
The imbalance between supply and demand in the market will accelerate the shift of the focus of the international energy map, from the previous supply-side leading to the demand-side leading, that is, the international crude oil market will be transformed from the seller’s market to the buyer’s market. Faced with sufficient market supply, major oil importing countries have a greater say. In recent years, the new map of global energy has gradually become clear, and the global consumption increase of oil and gas resources mainly comes from Asian countries such as China, Indian, Japanese and Korean. This round of falling oil prices will prompt emerging economies to play an increasingly important role in the global energy market.
Shale enterprises will be affected.
The international oil price plummeted, and those high-cost oil producers were the first to be injured, and shale oil and gas enterprises, especially those with small scale and high debt ratio, were the first to bear the brunt. It is estimated that at the current oil price, most shale oil wells drilled in the United States will be unprofitable. Elacott, senior vice president of Wood Mackenzie, an energy consulting company, believes that falling oil prices may trigger a new round of deep adjustment in the industry.
It is estimated that the production cost of most American oil and gas enterprises is above $50 per barrel. When the oil price drops to $30/barrel, only a few companies, such as ExxonMobil, Chevron and Western Petroleum, can continue to drill new wells to make profits, and the rest will all lose money. Different from traditional oil and gas, shale enterprises must constantly drill new wells to maintain production, which requires constant additional investment. To this end, a large number of shale oil companies have to raise funds by issuing bonds. Nowadays, the sharp drop in international oil prices has affected investors’ expected returns and spending plans, making it difficult for shale companies to raise funds. Small and medium-sized oil companies in the United States have begun to cut their investments, such as Apache, which has cut 37%, and Devon Energy, which has cut 30%.
Fitch Ratings, a rating agency, predicts that from 2020 to 2022, American shale oil and gas companies will have debts of nearly $200 billion due soon. Due to the sharp drop in oil prices, their debt ratings are close to "junk bonds", and the financing costs of shale oil and gas companies will rise sharply. The production of shale companies with no financing is unsustainable, and will usher in a wave of bankruptcy and become the first batch of "killed" enterprises. Norway’s Ruizide Consulting Company predicts that the crude oil production capacity of American shale companies facing bankruptcy this year will reach 2 million barrels per day. During the low oil price period from 2014 to 2016, dozens of shale enterprises in the United States went bankrupt.
Some analysts believe that the exit of American shale companies is exactly what Russia and Saudi Arabia want. The talks between Saudi Arabia and Russia collapsed at the OPEC+Energy Ministers’ Meeting in Vienna, and they failed to reach an agreement on reducing production and insuring prices, and then they started a price war. The main reason was that American shale companies squeezed their market share. "Kill one thousand enemies and lose eight hundred." By suppressing American companies in the form of price wars, Saudi Arabia and Russia have paid a great price and suffered great losses. Oil revenue of oil-producing countries depends on oil price and output. Now that the oil price is halved, the output must be doubled before the two phases can be even.
Besides, oil production in Russia and Saudi Arabia also faces cost constraints. Compared with American shale companies, Russia has a good resource endowment and its oil production cost is relatively low. Developed oilfield infrastructure and efficient railways and pipelines enable Russian oil giants to operate at a lower cost. According to estimates, Russian oil companies can bear the low oil price of $15/barrel. In other words, before the oil price drops to $15 to $20 per barrel, Russian energy companies can continue to maintain production, but their profits have shrunk dramatically.
For Saudi Arabia, the cost of oil exploitation is lower, less than $3 per barrel. However, in order to maintain the normal operation of the national economy, other costs attached to oil prices are quite high. Saudi Arabia’s national finance mainly relies on oil revenue to maintain the government’s fiscal balance, so it usually needs a high oil price of $80/barrel to support it. Saudi Arabia’s current account is very sensitive to oil price fluctuations, and it is difficult to withstand long-term price wars.
Overall beneficial to economic development
The sharp drop in international oil prices is indeed a big plus for China as a whole. As the largest net oil importer, the price of crude oil has fallen sharply, which is conducive to China’s significant reduction in crude oil import expenses.
Last year, China imported more than 500 million tons of crude oil, with a daily average of 10 million barrels, an increase of 9.5% over the previous year, and the import expenditure was about 166.3 billion US dollars. Now, falling oil prices will save China a lot of money and increase its current account surplus. Ordinary people have already felt the benefits of low oil prices. Recently, China’s refined oil prices have been lowered into the "5 yuan era", and motorists can fill up a tank of oil with less money. As the blood of modern economy, the decline in energy prices is conducive to reducing transportation costs, stabilizing prices, lowering the high CPI index, and providing more space for China’s macroeconomic regulation and control.
On international occasions, the decline in international oil prices is also conducive to China’s expansion of "oil diplomacy" space and provides opportunities for the development of "PetroRMB". Yujun Feng, vice president of the Institute of International Studies of Fudan University, believes that when the international oil market is oversupply and the price is low, China can learn from the experience of the European Union, and modify the clauses in the natural gas trade agreements with Russia, Turkmenistan and Myanmar that are linked to oil prices and pay according to demand, so as to safeguard our interests to the maximum extent. At the moment when "the market is king", major oil and gas producers are eager to compete for China’s market share. China can further increase the diversification of oil and gas imports and urge relevant energy suppliers to provide me with more favorable export prices and other conditions. When the international oil price falls into the era of low price, the "Petrodollar" in the financial market will drop sharply, and the oil transaction will tilt towards the buyer’s market, which is conducive to the internationalization of RMB and provides a rare opportunity for the rise of "PetroRMB".
However, the sharp drop in international oil prices will also bring a wave of impact to China’s energy industry. China is also a big oil producer, with an oil output of 190 million tons last year. Low oil prices will make domestic oil fields fall into losses and bring cold winter to local oil producers. Chinese-funded enterprises’ overseas oilfield investment will also be adversely affected.
The impact on the new energy industry should not be underestimated. Compared with the oil price of $30/barrel, new energy sources such as solar energy and wind energy will be less competitive in the power generation market, which is directly related to the survival of a large number of new energy enterprises and affects the healthy development of the national new energy industry. The spillover effect of low oil prices will also affect new energy vehicles. A joint study by the University of Chicago and the Massachusetts Institute of Technology shows that before the breakthrough of battery technology, the oil price of $50/barrel will make the development of electric vehicles difficult. Today’s oil price of less than $30/barrel will undoubtedly affect the development of new energy vehicles.
