It was another brutal day for oil prices; Crude Oil crashed another 10% yesterday. In fact, since the oil production cut
this week—which was supposed to help oil prices—the selling pressure has been building. OPEC+ has done its job, and it
would be foolish to expect any more production cuts from Saudi Arabia or Russia. Remember, initially, Russia wasn’t
ready for the production cut, and then the oil war was extended by Saudi Arabia. Eventually, we saw an agreement forged,
and the OPEC+ alliance settled for a production cut just shy of ten million barrels a day.
Crude oil is trading at $19.49 today and at this level, there is a significant threat to the U.S. shale oil industry.
So, what do we need?Organic production cut from the U.S. shale oil industryIncrease in Strategic Petroleum Reserve (SPR)Bargain hunters stepping inGlobal lockdown to ease off
In the absence of the above, Crude Oil prices are likely to fall further, possibly reaching the $16 mark.Organic Cut
The fact is, if oil prices fail to go back above the $30 mark, the U.S. hale oil industry is going to find it tough to
survive.
Donald Trump was proud that he forged a deal between Saudi Arabia and Russia, however, the president’s only goal was to
save the U.S. oil industry and its jobs. The Saudis and Russians are done with their production cuts, and it is highly
unlikely that we will hear any more from them, even if prices stay at the current level.
OPEC+ has always wanted the U.S. shale oil industry to make organic cuts, but oil production cuts from the U.S. shale
oil industry are based on CAPEX cuts from energy companies. This type of production cut isn’t enough to aid the oil
demand shock. Given the current climate, we need an organic oil production cut.Trump’s Agenda
I anticipate that we will hear something from President Trump if the oil price stays at current levels or begins to fall
below it. Elections are around the corner, and the last thing the president needs is untold damage to the U.S. shale oil
industry under his watch.
Under the current circumstances, it is highly likely that we will see another meeting among Texas oil officials. The
president may begin to exert pressure and ask them to intervene and reduce the oil supply.Strategic Reserve and Demand
There is no doubt that countries are busy increasing their strategic reserves. According to Saudi Energy Minister,
Prince Abdulaziz bin Salman, countries can increase their SPR by 200 million barrels over the next couple of months.
There are also signs that demand is picking up in China; various sources such as TomTom show that motor traffic has
increased enormously after the lockdown ended. Oil consumption has increased, but we are still far from pre-coronavirus
levels. Similarly, air traffic data and seat occupancy rates are also beginning to improve. Chinese refineries have also
started to operate at a much better level; some are even at 70%.
The fact is that the global lockdown may not ease off for another 2-3 weeks, and it will take another two months or so
before we see the world begin to return to normal. So, it’s likely oil demand will remain depressed for some time.Bottom Line
Crude Oil prices are way oversold, and near their support level, which may attract some bargain hunters. However, it
will take another four weeks for China to start consuming an amount of oil that can be classified as pre-crisis
level—and this is an optimistic picture. Therefore, bargain hunting has limited scope for the price.
The bottom line is that if oil prices stay below the $30 mark or decrease further, below the $25 mark, the rate of
bankruptcies in the U.S. shale oil industry will begin to spiral. The only thing that can save the industry now is an
organic oil production cut by the US shale oil industry itself.