Oil producing companies have been the chief victim from the recent collapse in oil prices, say experts, as lower prices severely impact producer’s revenue prospects for this year at least.
Oil prices have plunged dramatically since early March after Russia failed to agree with the Organization of Petroleum Exporting Countries (OPEC) on additional production cuts aimed at maintaining the price of oil. In response, producers have begun escalating production in a price war for market share that has seen oil prices fall by around 50 percent while demand has dampened due to the coronavirus pandemic.
“It’s no surprise that it’s the oil producers that are getting whacked, many off around 50 percent since the start of the month of revenue prospects are severely impacted this year and potentially beyond,” said Craig Erlam, senior market analyst for the UK and Europe, Middle East, and Asia (EMEA), at forex trading platform OANDA.
The new lows for oil prices have dragged energy companies stocks and bonds down, in addition to the bonds and currencies of oil producing countries. The Russian ruble has been hit particularly hard, trading down around 20 percent to the US dollar over the course of the last month.
Energy stock shareholders are also likely to feel the pinch. “Shareholders may as well abandon any hope to receive dividends from energy stocks, which historically been the best payer in the market,” said Marija Veitmane, multi asset class research senior strategist at State Street Global Markets.
Overall investment spending by these companies is also falling with producers from Aramco to Royal Dutch Shell slashing capital spending for the year ahead.
However, not everyone has suffered from the fall in prices – with consumers actually benefitting.
“The winners are consumers, ultimately. Low oil prices are good for consumers, especially with other aspects of their lives about to come under severe strain,” said Erlam.
With oil prices at very low levels, consumers will see benefits from falling product costs, to cheaper gas and petrol bills – a fact US President Donald Trump was quick to note shortly after OPEC-Russia talks fell apart.
Good for the consumer, gasoline prices coming down!— Donald J. Trump (@realDonaldTrump) March 9, 2020
As prices have fallen further, however, Trump has moved to support the US shale oil sector, which is under particular threat from a low oil price environment as producers of shale oil have a significantly higher cost of production than many other global players.
Oil importing countries could also benefit in the future but have not currently felt the effects, according to Veitmane.
“It is also too early for the oil importers to realize any boost from falling oil prices as economic activity is heavily restricted by attempts to contain the coronavirus,” she said.
The ongoing price war comes at a time when demand was already falling due to the coronavirus, officially known as COVID-19, pandemic which has caused market volatility as governments close borders and shut down businesses.
“Oil prices fell today as signs that the economy is far from recovering from the impacts of the COVID-19 continue to rise,” said Rystad Energy’s Senior Oil Market Analyst Paola Rodriguez-Masiu.
“We believe that prices will continue the slump, as we estimate that supply will surpass demand by more than 10 million barrels next quarter and storage infrastructure will be insufficient to support the current production level.”