Is the negative price of a barrel of crude a serious warning to the oil industry?

Audio 03:40

By: Dominique Baillard Follow

Does the negative price of oil reached last week presage the decline of the oil industry? This is the question that haunts American producers while the crude listed in New York continues to lose ground on the futures markets (-25% yesterday Monday and already -15% this Tuesday morning in Asia).

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In this legendary industry, no one had ever dared to imagine such a nightmarish scenario: a barrel at a negative price, this may however be repeated in the coming hours. This unthinkable event is attributed to an anomaly in the industrial chain: the lack of crude storage, which will eventually disappear once demand returns. A temporary event and therefore a priori not very significant for the future.

However, this shortage of tanks and pipelines in the United States is intriguing: how is it that the country which has once again become the world's largest producer of oil has not built new capacity? "Not profitable enough" responds investors, because it takes decades to amortize this new equipment. However, the shale vein was dug to record debt and it is based on a bet, that of a high oil price. Most newcomers lose money when a barrel is worth less than $ 40. Clearly an opportunistic and precarious activity, not designed for the long term. At current price levels, the days of these fragile businesses are numbered.

Donald Trump wants to support this activity which symbolizes the return of the greatness of America, private investors will be more difficult to convince. "  We have destroyed the capital that has been lent to us, no one today will support us,  " admits the director of Pioneer Natural Resources, one of the largest Texas shale oil companies.

Are the majors better equipped to survive this collapse in prices?

They do indeed have large cash reserves, they could also get their hands on the nuggets of the American shale, but contrary to what one might have thought at the start of the pandemic, they are not immune to the recession caused by the coronavirus. They too are under pressure from investors. We will see in the coming days, with the publication of their first quarter results, if they are able to pay dividends, and if they sacrifice their investment expenses. A prospect that is not very encouraging for the shareholders. In this case, will they keep these securities in their portfolio if the previously regular and juicy profits evaporate?

When demand picks up, will the oil industry regain its attractiveness to investors?

A 30% drop in oil demand is the real cause of the fall in the markets and it is a completely new shock and difficult today to predict a rapid return to normal with air transport at half mast for long time. A study published last year predicted that a barrel could tumble into the 10-20 dollar zone if the electric vehicle is successful. The coronavirus has sped up a full-scale stress test to see how it can survive in this ultra-low price environment. Black gold remains vital for activity, it is still the lifeblood of the economy, but the industry must now adapt to demand erasure, accidental or not, to keep investor confidence. Because this experience will leave traces in their memory: they now know that the thirst for crude is not unquenchable.

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