After the failed OPEC+ meeting last week, Saudi Arabia and Russia started a price war, and the price of a barrel of oil plummeted 24% on Monday, the worst single-day drop since the first Gulf War started in 1991.
Both countries promised to significantly increase their daily production come April 1st, when the current agreement expires. Saudi Arabia said it will increase production 25% to a record 12.3 million barrels per day (bpd) and Russia plans to boost production an extra 300,000 bpd.
This additional supply of oil comes at a time when demand is lagging due to coronavirus fears, and when oil prices were already down 49% year-to-date before factoring in Monday’s massive drop.
Whether or not the Saudi’s move to drive down the price of oil was to choke out the US shale companies as many have reported, the effects are already being felt here in the US.
Occidental Petroleum slashed its quarterly dividend 86% yesterday, from $0.79 per share down to $0.11, and reported it would also slash its capital expenditures by more almost $2 billion in an effort to shore up its balance sheet.
Occidental surely won’t be the only one cutting its dividend and slashing expenses, it’s just the first.
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During an appearance on CBNC’s Halftime Report, Jeffrey Currie, the global head of commodity research at Goldman Sachs, said “the next six months are likely to be painful. I think you’re going to start to see some real problems beginning to develop. The stress on the balance sheets were already there before Monday.”
He went on to predict that “way more than a dozen” companies would get consolidated in one form or fashion, but that it will ultimately be good for the industry.
“With prices down at these lower levels, we’re seeing an acceleration of that rebalancing process that is going to create a healthier industry as we look out 2 or 3 years from now.”
Echoing his thoughts are Jim Cramer, who took a more blunt approach to shakeout in the oil and gas industry.
On Monday, Cramer said that if the low oil prices continue, he expects to see “a wave” of bankruptcies.
Of the 35 or so companies he tracks in the sector, he said “I think fully maybe 9 or 10 can go (bankrupt).”
It remains to be seen if companies would in fact go bankrupt, or if the government would step in and provide financial assistance to help the companies stay afloat.
On Tuesday, it was reported that President Trump would likely seek federal aid for struggling energy companies in the form of low-interest rate loans.
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The US Department of Energy released a statement shortly after news of the proposed federal aid broke, saying:
“These attempts by state actors to manipulate and shock oil markets reinforce the importance of the role of the United States as a reliable energy supplier to partners and allies around the world. The United States, as the world’s largest producer of oil and gas, can and will withstand this volatility. The growth of the unconventional oil and gas industry in the United States has led to a more secure, resilient and flexible market.”
Trump also Tweeted that low oil prices were good for the consumer.
“Good for the consumer, gasoline prices coming down!” and later added in a separate tweet: “Saudi Arabia and Russia are arguing over the price and flow of oil. That, and the Fake News, is the reason for the market drop!”