Oil markets may be in line for a shake up similar to that seen in the late 1990s as prices fly past the point companies need to break even.

Oil prices plunged on Monday after Russia refused to join new production cuts to preserve a price floor, and Saudi Arabia retaliated by also refusing.

Both the Europe benchmark Brent and the US benchmark WTI are at or close to $US30 ($45) a barrel, prices not seen since the last price war in 2014/15.

Wood Mackenzie corporate upstream vice president Tom Ellacott says “many companies” need an oil price of $US53 to break even.

“This is not the first time we’ve seen a price war – the last was as recently as 2015/16. But this time, oil demand is also weak as the coronavirus outbreak depresses global economic growth,” he said.

“The macro-economic backdrop is completely uncharted waters for oil and gas companies.

“The price collapse could be the trigger for a new phase of deep industry restructuring – one that rivals the changes seen in the late-1990s.”


Wave of bankruptcies

Wall Street has been preparing for a wave of US shale oil and gas bankruptcies since late 2019.

While oil producers in the US, a region where there are a number of ASX-listed small caps play, are in a better position because of restructuring that took place in 2014/15, most aren’t in a position to handle lower for longer oil prices because of high levels of debt.

Wood Mackenzie analysis suggests that if Brent remains around $US35 for the rest of the year about $US380bn of cash flow will vanish from company forecasts and spur another round of cost cutting.

Earlier this year Stockhead reported on fears that shale oil was reaching its apex, as major producers such as Hess Corporation flagged that production in Bakken shale could peak within the next two years while the Permian will peak in the mid-2020s.

Last year by October 28 oil and gas producers had filed for bankruptcy as companies struggled to refinance debt taken out when prices were higher and when investors were more confident, OilPrice reported.

Almost 6 per cent of US energy companies with junk rated bonds were defaulting on their debt by August, the highest level since 2017.

Ellacott says cost cutting will be brutal and swift, with the more indebted players needing to make deeper cuts, faster.

“There is much less obvious excess spend to cut this time around after five years of disciplined investment and austerity,” he said.

“Raising capital is also much harder now, especially for US Independents, and upstream M&A market activity is at record lows. In addition, many companies have already made the most of the obvious asset sales.”