“The significant fall in the US oil price has been the result of a combination of factors which has been intensified by the US share of an unparalleled drop in global demand of 25-30% in this quarter alone, due to the global COVID-19 lockdown.
“The West Texas Intermediate (WTI) price drop is not reflective of the oil and gas industry worldwide but is very specifically driven by the production and demand imbalance in the US. Most of the production is land-locked, and with storage facilities close to maximum capacity a further fall in the US benchmark crude, WTI, was inevitable. Yesterday’s headline-grabbing negative oil price of $40 bbl was driven by a relatively small number of May contracts held by financial traders having to be sold before they expired today, and the sellers finding there was absolutely no buyers.
“OPEC+ have agreed cuts to supply which will shift things in the right direction, but these do not commence until 1 May. In the medium term this action should be enough to rebalance the relationship between supply and demand as global demand will increase as the COVID-19 lockdown comes to an end. However, we should expect a lot of volatility over the next couple of months and for crude prices to sit in the lower range as we experience a supply overhang of as much as 15 million barrels a day.
“While yesterday’s WTI prices won’t directly impact on the UKCS, this is a stark reminder of oil price volatility, and that smaller UKCS producers may find it very hard to sell their crude at the prevailing market rate. The oil field services sector hasn’t recovered from the 2014 fall in oil price and this has been compounded by the current low-demand environment. There is likely to be a renewed focus and rigour on decreasing operational costs, particularly for smaller players. The companies which respond quickly, are agile and carefully strategic are likely to emerge in a better position in the medium and long-term.”