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News Article

Shell to Write Down Up to US$22 Billion, But Not All Bad

By Peter Appleby | Wed, 07/01/2020 - 08:52

Shell is to write down by to US$22 billion in 2Q20 reports Reuters, following in the footsteps of fellow oil major BP and illustrating the grave impact of the challenge oil is facing in the post-pandemic period.

According to the report, Shell “cut its forecast for energy prices into 2023 on expectations that sales will only recover slowly after the pandemic, adding to the company’s already bleak longer-term outlook for fossil fuel demand.” The write down estimated will range from US$15 billion to US$22 billion, the company says.

Earlier this month Mexico Business News reported that BP had written-down US$18 billion of oil and gas assets due to the company’s own estimation that oil prices would fall “between 20 percent and 30 percent” over the next few decades.

Royal Dutch Shell is among the Top 10 largest oil companies in the world by production. The heavy impact of COVID-19 sent oil demand plummeting in the first quarter of the year and though it has recovered somewhat with the reopening of some economies, it is well below forecast levels. With the demand slump, prices went negative. They have climbed considerably since then but are still below pre-pandemic levels.

In the past week, WTI and Brent have hovered at around US$39 per barrel and just above US$40 per barrel, while the Mexican crude barrel has risen to US$34.51 over the past seven days.

The successive write downs are dire signals of the industry’s current health and the clear concern that the world’s largest operators have about a quick recovery or jump in prices.

Despite this, some analysts consider that prices will rise again and could hit US$190 per barrel. Little over a week ago, JP Morgan Head of Europe, Middle East and Africa Christyan Malek told CNN that “the reality is the chances of oil going toward US$100 at this point are higher than three months ago.”

In March, Malek had predicted that the industry is about to witness a “supercycle” created by the coming 2022 deficit, generated by the historic 9.7MMb/d OPEC+ production cut to bring prices back into black after they fell into negative territory in April. The deficit will arrive at 6.8MMb/d in 2025, at which point prices for the commodity will hit US$190 per barrel. 

The deficit speaks for itself. That implies oil prices will go through the roof. Do we think it's sustainable? No. But could it get to those levels? Yes,” Malek told CNN.

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Peter Appleby Peter Appleby Journalist and Industry Analyst