Oversupply leads to lowest oil price in 17 years
With a price per barrel of $23,5, oil has reached its lowest price since November 2002. Because of the corona crisis, oil consumption has dropped 10 to 15%. Also, the dispute between Saudi-Arabia and Russia seems to have no end. This has led to an oversupply of oil on the market.
Saudi Arabia indicated that it has no contact with Russia about a reduction in oil production. The Russian Deputy Minister of Energy, Pacel Sorokin, said that an oil price of $25 a barrel is unpleasant, but not a catastrophe. A solution does not seem imminent.
ABN AMRO sees the oil price gradually rise to $25 at the end of June, and $45 by the end of December. KBC expects the oil price to rise from $22 per barrel at the end of June to $37 by the end of December. According to KBC, an oil price below $20 is likely in the short term. But at that level, many producers are not covering their costs.
The low oil price is already causing shale gas production problems in the US. The number of active US wells decreased last week by 40 to 624. That is the largest decline in one week since April 2005.
In order to maintain sufficient cash flow, many oil companies are reducing their investment budgets. Five large ‘oil majors’, including Saudi Aramco and Royal Dutch Shell, have announced that they will invest 19 billion dollars or 18% less.
The major oil producers, according to KBC, want to retain at least an A rating to be able to continue to borrow money at low-interest rates. Shell is now rated AA-, BP A-, Total A+ and Exxon Mobil and Chevron each AA. KBC is counting on the companies to maintain their dividends unless the crisis lasts too long.
Price at pump
The drop in oil prices, however, is good news for consumers. In Belgium, the price of heating oil has dropped to €0,4156 per liter. At the beginning of this year, one liter still cost €0,6987. This means that an order of 2 000 liters of heating oil is 566 euros cheaper than on January 1st.
The price of gasoline (95 E10) rises by 0,025 euros per liter to €1,167, but remains much lower than at the beginning of this year. A tank of 50 liters is €17,35 cheaper than on January 1st. For 50 liters of diesel, it is €14,6.