08-5-2020 10:12:0128-4-2020 10:40:5128-4-2020 10:36:2828-4-2020 10:30:0028-4-2020 10:08:0728-4-2020 10:03:44The falling out between Saudi Arabia and Russia may have been the catalyst for the recent biggest slide in oil prices since the Gulf War earlier this month, but it’s likely to be the rolling lock downs that are taking place across the world that could see prices fall even further.

With no signs of oil demand picking up in the near future, the pressure on oil producing countries as well as highly leveraged shale and other oil producers is likely to intensify in the coming weeks. Even with the US buying up oil to top up its strategic reserves the price has continued to fall.

With oil demand set to fall sharply and the coronavirus lockdowns set to suppress consumer demand for weeks and possibly months we could well see a bloodbath in the US shale industry, while the more established players could well find themselves having to slash their dividends.

In the last month we’ve seen both the share prices of BP and Royal Dutch Shell drop to their lowest levels since the mid 1990’s, while Exxon in the US and Total in France have also seen big falls.

We are now seeing both Brent and WTI prices closing in on their 2016 lows, which could well open a move to levels last seen in 2003, down towards $20 a barrel, which if sustained is likely to be enormously painful for some US shale producers, as well as the Gulf states.

The key level for US WTI sits just below $26 a barrel right where we are now, while Brent crude has support at $27 a barrel.

Russia probably has a higher pain threshold given the resilience of the rouble, while Iran is set to suffer even more given current sanctions and a coronavirus outbreak.

 

Source: CMC Markets

As can be seen from the chart above the decline in US shale prices has been even more pronounced and continued falls in the oil price will call into question, not only oil company dividends, but also their refining capacity, if they can’t shift their product.

Brent prices don’t look much better, however are still above long term support.

 

Source: CMC Markets

That may change if both these key support areas give way, opening up sharp moves lower, given we are already well below the lows we saw at the height of the 2008 financial crisis.

Sustained low oil prices at these levels also call into question the sustainability of oil company dividends with both BP and Shell’s dividends now both in excess of 12%. While this seems quite attractive it also needs to be set in the context of share price declines year to date which are now over 55% for Royal Dutch Shell and over 45% for BP, with little sign of a base in the near term.

The oil companies can cut capex in the short term to conserve cash and management and this is an area which is likely to see cuts, buts not a long term strategy, while increasing debt is also becoming more difficult given their gearing levels. Shell has been buying back its shares and it may well need to reconsider this strategy, and while cutting the dividend is seen as a last resort it can also be the responsible thing to do for the long term sustainability of a company’s finances.

BP’s problems are particularly acute given their acquisition of BHP Billiton’s shale assets a couple of years ago for $10bn. With a gearing of over 30% and a breakeven price of just below $50 a sustained period of lower oil prices is going to be painful and could well mean that shareholders might have to absorb a dividend cut if oil prices don’t recover by year end.

As things stand with demand set to fall as airlines cut capacity and people travel less due to concerns about fresh coronavirus outbreaks, the longer term outlook is likely to be constrained by the green agenda.

In the US the problem could be even more acute given that the full impact of the virus has yet to bite fully, which opens up the prospect of thousands of job losses in the coming months, as the share prices of their major oil companies look to test levels last seen in 2003.

This will present a clear challenge to these oil majors who have to all and intents and purposes been well behind the curve in preparing their business models for a lower carbon and lower demand world.

CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person


Disclaimer: CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.