Stumbling Oil Prices Suggest a Long Road to Recovery

This morning, prices of the world’s oil benchmarks fell at the start of trading after five straight days of improving health, underlining the stuttering nature of the recovery after OPEC+ reductions came into force.

Yesterday, Mexico’s oil basket rose 19.26 percent to reach US$21.67 and record its second day of gains. WTI and Brent also saw strong rises, with the American mix adding 20 percent and Brent breaking the US$30 per barrel price mark.

WTI had sat at US$25.87 on Tuesday evening before falling back to US$22.65 on Wednesday morning. Similarly, Brent fell back below US$30. Though PEMEX will not release the price of the Mexican oil basket until this evening, Mexico’s crude could follow a similar faltering pattern.

Price volatility in the wake of the COVID-19 pandemic has been expected but the rise and fall of prices shows that the road toward higher ground and industry stability will be a long one. However, the recent increase appears to be a positive response to the OPEC+ production cut that took 9.7MMb/d off the global market and is helping to reduce the vast oversupply problem the industry is struggling with. The cut will also help remedy the issue of tank tops being hit, while the gradual reopening of economies will drain the storage glut further.

But prices are still hard to predict. Amena Bakr, Deputy Bureau Chief at Energy Intelligence, said in a video conference hosted by IBERO Puebla last week that forecasting is still difficult because the world is still in the grips of the pandemic, which may or may not have outbreaks in the future. The Energy Intelligence Research Unit forecasts Brent prices to reach US$40 per barrel in 3Q20 but this is still well below the barrel’s price at the start of this year, which hovered in the high sixties.

Ongoing volatility is set to price wells out of viability for the short-term future, at the least. PEMEX has already said it will shut in wells on new fields to reduce costs and announced a US$1.9 billion reduction in its investment budget alongside a huge US$23 billion loss in 1Q20.

Luke Johnson of Energy Intelligence reports that the North Dakota Industrial Commission (NDIC) has already curtailed 450Mb/d of production through the shut in of 6,800 wells. “NDIC set to discuss potential further regulatory measures on May 20,” he tweeted.

According to Rystad Energy, the global investment slowdown that followed in the wake of COVID-19 and the demand destruction it brought will actually deliver a scenario of undersupply in 2025. The consultancy firm says there will be a 5MMb/d global shortfall in five years due to the E&P reductions which will “leave not only short-term, but also long-term scars on the oil market.”