Oil analysis

By Névine Pollini, gérante actions à l’Union Bancaire Privée

 ■ On Friday, OPEC and its allies failed to reach an agreement to cut production further in order to balance the oil market and support prices. The idea was for OPEC members to cut production by 1mn bpd and its non-OPEC allies to cut by 500,000 bpd. According to OPEC, due to the coronavirus epidemic, “global oil demand growth in 2020 is now forecast to be 480,00 bpd, down from 1.1 mn bpd in December 2019”. Goldman Sachs is even seeing oil demand growth falling into negative territory (-150,000 bpd).

■ The falling out between Saudi Arabia and Russia, whose alliance has helped brace oil prices for the past three years, will now lead to a price war pushing oil to multi-year lows.

■ Saudi Arabia and Russia have both announced that they will pump more in order to protect their market share. According to Bloomberg, “Saudi Arabia has privately told some market participants it could raise production to well above 10 mn bpd… even going to a record 12mn bpd”.

■ Russia refused to cut its output, being a diversified economy that can afford an oil price as low as USD 42 to rebalance its budget. This unprecedented situation is different for other, mono-exporting economies like the Gulf countries and Saudi Arabia, which requires a price of at least USD 80 to balance its budget. As for oil-exporting countries that are already struggling, such as Iran and Venezuela, this price collapse could cause social unrest and political crises to flare up.

■ The immediate pain will be felt by the US shale industry, with shale oil being too expensive to extract and most companies in the sector heavily in debt. Insolvency among shale oil producers could become a problem.  Shale has also been a major component of capex and any developments will naturally affect oil service providers like Halliburton and Schlumberger.

■ We believe the oil market is facing a lethal combination: too much global oil production coupled with slowing global economic growth. We would definitely stay away from the sector, and are maintaining the underweight sector rating we have recommended since September 2019.

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