The epic supply glut is the big culprit behind the oil price slump
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There’s been many catalysts for low oil prices including the coronavirus and the trade war between Saudi Arabia and Russia.
And the fallout from this has been an epic supply glut never before seen in history, which in turn has led to a massive drop in oil prices. Great for people buying petrol, but not for the oil producers.
“The last time that there was a global surplus of this magnitude was never,” Jim Burkhard, vice president and head of oil markets at London-based intelligence firm IHS Markit, said.
But IHS predicts that excess supply could reach between 800 million and 1.3 billion barrels in the first six months of this year.
“Prior to this the largest six-month global surplus this century was 360 million barrels,” Burkhard said.
“What is coming will be twice that or more.”
But it’s not just a supply side issue. Demand has wavered as well. Bloomberg estimates the exact split between demand and supply is 54-46 based on its own modelling.
“The slowdown in global growth is hitting demand,” economist Ziad Daoud said.
“The International Energy Agency expects appetite for oil to fall by about 90,000 barrels per day in 2020 compared with last year — the first decline in demand since 2009, the peak of the global financial crisis.”
Although Daoud expects demand to pick up once the economy recovers, he reckons the supply issues will be longer-lasting.
ASX small cap explorers, such as Buru Energy (ASX:BRU), Otto Energy (ASX:OEL), Whitebark Energy (ASX:WBE) and Byron Energy (ASX:BYE), have now suspended operations. All of these stocks have plunged 20 per cent or more today.
Even heavyweight Santos (ASX:STO) is not immune from the current crisis, although its fall today was a more modest 7 per cent. The company has cut its capital expenditure by 38 per cent and is selling stakes in some of its projects.
But it still wants to deliver on its production targets.
“The current environment is a time for discipline. In the short term, we will remain focused on the health and safety of our people and delivering our production target for 2020, whilst not compromising on safety or asset integrity,” CEO Kevin Gallagher said.
“Whilst the current oil price dynamic is challenging, the eventual recovery will create opportunities for companies positioned to act on them.”