Will the Covid-19 sound the death knell for American oil?

For a handful of dollars. American black gold continued to move at midday Tuesday, April 21, at historically very low prices ($ 5 a barrel), after a staggering fall of 300% the previous day, which had propelled it to -36 dollars. 

Clearly: in a context of the Covid-19 pandemic that is slowing the world economy, “no one wants oil that continues to be extracted”, summarizes Vincent Boy, market analyst specializing in raw materials for society brokerage IG, contacted by France 24. Indeed, why buy this hydrocarbon if the planes remain grounded, and if the refineries hardly refine anymore?

For their part, the sellers are in a hurry to get rid of the surpluses, which accumulate, even if it means paying possible buyers rather than having to settle the rent for warehouses which become more and more expensive, as the meters Oil storage squares are hard to find. "There is little more than in China where there is still room," said Vincent Boy.

US oil producers on hold

The price of a barrel of American crude was the first to fall below 0 dollars. Brent oil fields in the North Sea are still trading at over 20 dollars, but the price is also falling sharply and "the trend follows that of the American market," said Vincent Boy.

The specificity of the historic plunge in American oil is due to a technical detail. The prices concern oil supposed to be delivered at the end of May and, given the circumstances, “the investors think that there will then be no more storage capacity, while they do not anticipate a resumption of activity at a so short term ”, explains the French analyst. On the Brent market, contracts are already being negotiated for June or July and, by this date, industry professionals are hoping for a better economic context in China and, to a lesser extent in Europe or the United States, which could allow to give a little color to black gold. It is for this reason that the price of American oil available in June is still negotiating around 20 dollars.

But whether American crude sells for $ 20 or - $ 30 doesn't make a big difference to those who are primarily affected by this drift in barrel prices: the hundreds of independent American oil producers. The unprecedented situation of a negative tariff only reinforces the certainty that a significant number of them will not survive this crisis. Indeed, "almost 80% of independent American oil companies will go bankrupt if the price of a barrel remains at 20 dollars or less for a while," said Scott Sheffield, CEO of Pioneer Natural Resource, one of the heavyweights of shale oil from the United States, before the Texas Commission for the Regulation of Oil Production last week. With a barrel at around 30 dollars, these oil companies would, according to this entrepreneur, have a chance to repay the substantial loans, which have been granted to them in recent years.

Without this, the coronavirus will decimate the ranks of the American oil industry at very high speed. "For some it is a matter of weeks, while the most robust can last a few months," said Vincent Boy.

Why Donald Trump wants to put America back to work in May

So it's a race against time that promises to save the 250,000 or so jobs that depend on these independent oil producers in the United States. It is no coincidence that President Donald Trump, who has made safeguarding these jobs one of his priorities, insists so much on getting America back to work in May. Everything is a matter of anticipation on this market: if the economy starts again in May, investors can bet on an improvement in the situation in the second quarter of 2020 and get oil prices going again very quickly. If containment remains largely in place in the country beyond May, "it becomes very difficult to imagine a recovery in the economy in the second quarter," said Vincent Boy.

Especially since Donald Trump does not want to save the American oil sector only for the workers' eyes. It is also a question of geostrategic choice: the United States has invested heavily in national oil production for years to reduce its dependence on imports of hydrocarbons in the name of “energy sovereignty”. 

They managed, thanks to the shale oil boom, to become the world's leading producer of black gold, which allowed them to have a voice that brings the big oil powers to the table alongside Saudi Arabia or still from Russia. A long-term strategy which is now in danger of being called into question due to a virus. "This crisis is clearly likely to change the balance of power in favor of the OPEC countries", recognizes Vincent Boy.

Always reduce world production

However, this dramatic drop in crude prices does not do the business of the historic cartel of oil producing countries either. A barrel below 20 dollars puts very strong financial pressure on all the countries which, like Saudi Arabia or Russia, depend heavily on their hydrocarbon exports. For Riyadh, this shortfall risks slowing down investment projects aimed at diversifying its economy to make it less dependent.

The Wahhabi kingdom is aware of the risk. After playing with fire at the start of the pandemic by unilaterally deciding to lower the price of its oil, thus accentuating the already declining trend, Saudi Arabia negotiated with Russia last week, an historic reduction of world oil production. OPEC and Moscow have decided to lower it by 20 million barrels per day for two months in the hope of pushing prices up again.

This drop is far from sufficient since global demand is expected to drop by around 30 million barrels per day until the second quarter, according to the International Energy Agency's expectations. Producing countries should therefore make an additional effort, but Vincent Boy believes that such an agreement is not very credible because “there are too many divergent interests on this question”. Between Saudi Arabia which is ready to play the card of a very inexpensive oil to nibble on market shares, the United States which cannot absolutely afford it or even Russia which is somewhere between the two , it's going to be difficult to find common ground. 

Which leaves Donald Trump facing a difficult choice. He can insist on restarting the economy in May in the hope of saving his oil sector, at the risk of promoting the spread of the virus which would lead to an increase in the number of deaths. Or else be convinced by the scientists and maintain the health status quo, leading to a probable slaughter among the oil groups, where the president has some of his richest political supporters.

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