Crude oil tankers. (REUTERS)
Crude oil tankers. (REUTERS)

With oil markets flooded, US shale under threat as presidential polls loom

  • The fall in crude oil prices has placed major consumers such as India at an advantage
  • The fall in crude prices could lead to positive terms of trade for the third-largest oil importer

NEW DELHI: With the world’s largest crude oil producer Saudi Aramco planning to boost crude oil supplies to 12.3 million barrels per day in April, and Russia lifting all production curbs, it is the US shale industry that will bear the brunt of it as the country goes to presidential polls in November.

Brent prices on Wednesday were up and the international benchmark crude oil was trading at $37.22 per barrel, far lower than the highs of $147 per barrel in July 2008. The West Texas Intermediate (WTI) was at $33.69 per barrel.

While Saudi Arabia has the lowest cost of production at around $3-5 per barrel, Russia also has a cushion given that its on shore production costs are around $16-18 per barrel. In comparison, a typical US shale well requires oil to be at $68 to post returns. India has been sourcing LNG and crude oil from the US, with Indian companies investing $4 billion in US shale gas assets.

Chris Lafakis, energy economist at Moody’s Analytics in a report said, “we will likely be looking at low oil prices for the rest of 2020 … market participants should get ready for the $30s."

According to Pioneer Natural Resources Co. chief executive officer Scott Sheffield, US oil output could drop nearly 20 per cent in the backdrop of the crude oil price war unleashed by Saudi Arabia, post the unravelling of the Organization of the Petroleum Exporting Countries (Opec) plus arrangement. This has put the oil markets in a tailspin, resulting in one of the biggest one day fall in the international benchmark Brent crude prices on Monday. The oil markets witnessed the worst price dip since the 1991 Gulf War.

The fall in crude oil prices has placed major consumers such as India at an advantage. India is the world’s third-largest crude oil buyer and the fourth-largest liquefied natural gas importer.

“Gloves are now off and while Russia and Saudi Arabia’s strategic misalignment was the trigger for this next supply shakeout, U.S. E&Ps will very much be at the receiving end of the price collapse. With WTI prices already trading around $30/bbl in early trading on Monday, the industry will need to react swiftly and decisively in the face of the acute decline in cash flow," wrote Roger Diwan, vice president, financial services, IHS Markit in a report.

Crude oil crashed more than 30% on Monday in the sharpest plunge since the 1991 Gulf War after the collapse of the Opec plus alliance talks triggered a bloody price war. Also, Paris-based International Energy Agency lowered its annual global demand forecast for the first time since 2009 and Opec slashed global demand growth.

“Markets face a 1-2 MMb/d potential downside swing in demand (depending on the severity of COVID-19) and 1-2 MMb/d potential upside swing on supply," the IHS Markit report said and added, “Saudi Arabia’s aspiration appears to be that the supply damage wrought in the U.S. and pain caused elsewhere will be sufficient to bring other producers back to the negotiating table in short order."

The cost of the Indian basket of crude, which averaged $56.43 and $69.88 per barrel in FY18 and FY19, respectively, averaged $65.52 in December, according to data from the Petroleum Planning and Analysis Cell. The price was $47.92 a barrel on 6 March. The Indian basket represents the average of Oman, Dubai and Brent crude.

Every dollar per barrel drop in crude prices reduces India’s oil import bill by Rs10,700 crore on an annualized basis. Retail prices of petrol and diesel in India track global prices, not crude, but are broadly linked to crude oil price trends.

The fall in crude prices could lead to positive terms of trade for the third-largest oil importer that could reduce inflation and boost domestic demand if the benefits are transferred to consumers. Lower oil prices also have an indirect impact through lower production and transportation costs and could put downward pressure on food inflation.

"Aramco’s OSPs are fixed monthly differentials to their respective regional crude benchmarks. The proposed differentials for April were staggering, with OSPs slashed between $5/bbl and $8/bbl in the largest month-on-month revision in recent memory. Cuts went across the board but were particularly acute in the Atlantic Basin, with OSPs to Europe and the U.S. slashed $7/bbl or more, clearly aimed at key Russian markets," the IHS Markit report said.

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