Don’t expect higher oil prices for some time, says one energy analyst.
“The markets are still worried that we will not have freedom of movement, and we will not see demand recover until some time in the summer, and there’s a lot of debate,” Regina Mayor, global head of energy for KPMG, told Yahoo Finance.
“Personally I'm very bearish on crude price beyond 2020 and even into 2021,” she added.
On Tuesday, US crude futures for June delivery (CLM20.NYM) cratered along with Brent crude (BZ=F) amid a collapse in oil demand due to COVID-19. The sell-off followed Monday’s crash of WTI (CL=F) May futures which plunged below zero for the first time in history. Oil producers were paying buyers to take crude off their hands as storage capacities were full with unused oil.
Members of OPEC and their allies recently announced a production cut of 9.7 million barrels a day to help prop up prices. Analysts point out those cuts won’t start until May — and are not enough to offset the collapse in demand.
Big oil companies have been forced to slash their capital spending and suspend new projects. It’s also difficult for some companies to stop producing oil temporarily. Shutting down some of the older wells puts them at risk of never reopening. “If you shut in some of the older wells, and they are small players operating at like 50 to 100 barrels per day, the belief is that that’s a structural shut-in. Likely, we will never restart that well again,” said Mayor.
‘Those that could not take physical delivery for that crude oil, really shouldn't have had a position’
The US crude price crash for May delivery contracts which expired today involved the obligation to take physical delivery.
“There were probably some hedgers and some speculators that just got caught exposed. I mean those that could not take physical delivery for that crude oil, really shouldn't have had a position yesterday ... Most of them got out last week,” said Mayor.
She predicts regulators may enact changes to avoid a similar crash in the future.
“Was there behavior that needs to be checked, or are are there mechanisms, market mechanisms that need to be put in place?,” asked Mayor.
“I also think the exchange itself will have to have a good hard look at itself to say were there governors that should've been put in place to prevent the kind of crazy trading behavior that we had,” she added.
In a note to investors on Tuesday, Goldman Sachs predicted a “violent rebalancing” for oil in the coming weeks, warning “price volatility will remain exceptionally high” in the near term.
Ines covers the US stock market from the floor of the New York Exchange. Follow her on Twitter at @inesreports.