Crude oil is trading at $19.60 today and at this level, there is a significant threat to the U.S. shale oil industry. So, what do we need?
Organic production cut from the U.S. shale oil industry
Increase in Strategic Petroleum Reserve (SPR)
Bargain hunters stepping in
Global lockdown to ease off
In theabsence of the above, Crude Oil prices are likely to fall further, possiblyreaching the $16 mark.
OrganicCut
The factis, if oil prices fail to go back above the $30 mark, the U.S. hale oilindustry is going to find it tough to survive.
DonaldTrump was proud that he forged a deal between Saudi Arabia and Russia, however,the president’s only goal was to save the U.S. oil industry and its jobs. The Saudis andRussians are done with their production cuts, and it is highly unlikely that wewill hear any more from them, even if prices stay at the current level.
OPEC+ has always wanted the U.S. shale oil industry to make organic cuts, but oil production cuts from the U.S. shale oil industry are based on CAPEX cuts from energy companies. This type of production cut isn’t enough to aid the oil demand shock. Given the current climate, we need an organic oil production cut.
Trump’sAgenda
Ianticipate that we will hear something from President Trump if the oil pricestays at current levels or begins to fall below it. Elections are around thecorner, and the last thing the president needs is untold damage to the U.S.shale oil industry under his watch.
Under thecurrent circumstances, it is highly likely that we will see another meetingamong Texas oil officials. The president may begin to exert pressure and askthem to intervene and reduce the oil supply.
StrategicReserve and Demand
There isno doubt that countries are busy increasing their strategic reserves. Accordingto Saudi Energy Minister, Prince Abdulaziz bin Salman, countries can increasetheir SPR by 200 million barrels over the next couple of months.
There arealso signs that demand is picking up in China; various sources such as TomTom showthat motor traffic has increased enormously after the lockdown ended. Oilconsumption has increased, but we are still far from pre-coronavirus levels.Similarly, air traffic data and seat occupancy rates are also beginning toimprove. Chinese refineries have also started to operate at a much better level;some are even at 70%.
The factis that the global lockdown may not ease off for another 2-3 weeks, and it willtake another two months or so before we see the world begin to return tonormal. So, it’s likely oil demand will remain depressed for some time.
BottomLine
Crude Oilprices are way oversold, and near their support level, which may attract somebargain hunters. However, it will take another four weeks for China to startconsuming an amount of oil that can be classified as pre-crisis level—and thisis an optimistic picture. Therefore, bargain hunting has limited scope for theprice.
Thebottom line is that if oil prices stay below the $30 mark or decrease further,below the $25 mark, the rate of bankruptcies in the U.S. shale oil industrywill begin to spiral. The only thing that can save the industry now is an organicoil production cut by the U.S. shale oil industry itself.