Price of North Sea Brent crude oil has been dramatically lower since the beginning of the year. It is currently trading at $ 21 per barrel, an unprecedented decline of 68% since the beginning of the year. At the same time, it is the lowest level in the last approximately 20 years. The price of US light oil WTI (West Texas Intermediate) even fell into the red for a while at the beginning of the week, which meant that sellers were paying buyers.
The reason for this dramatic decline is nothing more than the global pandemic COVID19 and the fundamental excess of supply over demand. Although the OPEC oil cartel, together with Russia, announced two weeks ago that it would reduce production by 9.7 million barrels per day, this reduction is by no means sufficient, as the drop in global demand is almost 30 million barrels per day, or almost a third of total demand. Therefore, storage capacity is running out very quickly in the world.
In the coming weeks, oil is very likely to remain under strong pressure, as it will take relatively long for economies around the world to return to normal, at least in general terms. Therefore, most of the world's producers are likely to continue to suffer severely, as current oil prices are well below production costs. Probably the biggest problem is for the shale producers in the US, whose average total mining costs are around $ 40-50 per barrel. In addition, most of these companies are heavily indebted when they fall into a non-investment speculative (high-yield) level in terms of credit rating. It is therefore not surprising that several of these companies have already filed for bankruptcy.
Investment Strategist at Conseq Investment Management, a.s.