“Oil prices to remain low and very volatile”

Singleton 2 IGas

IGas Singleton oil site in West Sussex. Photo: IGas

The former head of BP and the fracking firm Cuadrilla has warned that oil prices will remain low for “some considerable time”.

Lord John Browne said supply during the Covid-19 pandemic was outstripping demand and cuts in production due to come in next month were “far too small”.

Speaking on the BBC’s Today programme, he said:

“Generally, in the world, demand is down, production is still high, and as a result the prices will be very low. And I think they will remain low and very volatile for some considerable time.”

He said:

“Demand is down probably around 30% and the production cut was around 10% so obviously there is still a lot of oil being produced that is going into storage and not being used.

Because of the Covid-19 outbreak, he said:

“People simply are not flying, they are not driving, industry is slow, so obviously demand is down significantly.”

Lord Browne said the oversupply was “very reminiscent of a time in the mid-80s” when, he said, oil prices stayed low for 17 years.

The US benchmark price for oil, West Texas Intermediate (WTI), dipped at one point yesterday to minus $37 a barrel. This was the result of futures trading on contracts for May, which were about to expire, and traders could not find buyers with storage capacity.

At the time of writing, WTI for June delivery was $14.53 a barrel, down nearly 29% on yesterday’s close.

The British benchmark, Brent Crude, was $19.94 a barrel, down 22% on yesterday’s close. Three months ago, it stood at $64.59 a barrel.

Oil company warnings

igasIn the past few weeks, several UK onshore oil companies have warned about the risks of prolonged low oil prices.

Earlier this month, IGas – the UK’s second largest onshore oil producer – said it could meet its commitments if prices were $20-30 a barrel for the rest of this year.

But it forecast:

“should oil price or demand (and therefore revenue) fall further, the Company may not have sufficient funds available for 12 months from the date of approval of these financial statements.”

This and other material uncertainties “may cast significant doubt on the group’s ability to continue as a going concern”.

IGas said it had shelved some exploration plans in Surrey until energy prices improved.

Also this month, Egdon Resources said its older UK onshore fields were unprofitable at what were then current prices.

It said it had cut work programmes offshore in Ireland and Morocco and would concentrate on production from the Wressle oil site in north Lincolnshire, which it predicted could break even at $17.62 a barrel.

Europa Oil & Gas, one of the other main investors at Wressle, said it had cut salaries and cancelled non-core contracts because of the Covid-19 outbreak and oil price falls.

The company’s interim chief executive, Simon Oddie, said:

“These are challenging times for the oil and gas exploration and production industry with the combination of market turbulence and depressed oil prices.

“We have responded by making appropriate cost savings and adjustments in the business whilst maintaining the integrity of our core strategy.

“Further economies will be made if conditions do not improve in the medium term.”

UK Oil & Gas, which has sites in Sussex and Surrey and has plans for the Isle of Wight, also said it was cutting costs.

At the end of March, the company said:

“the Group has delayed its capital expenditure programme across its assets as the effects of Covid-19 have significantly constrained the supply of specialist oil sector services, equipment and civil engineering activities.”

It said it was “actively reducing operating costs” at the Horse Hill oil site near Gatwick Airport. It said the cost reduction exercise would continue, “with the aim of positioning the field to at least break even at current Brent prices”.

At the time of writing, UKOG shares were down more than 8% at 0.275p. Egdon Resources was down 9.52% at 1.90p. IGas was unchanged at 29p and Europa unchanged at 0.95p.

Climate and health lessons

Asked if we had passed the moment of peak demand for oil, Lord Browne said “That is quite possible”.

He said the amount of oil used for every unit of gross domestic product had fallen by about 1.5% a year.

He said the demand for hydrocarbons would continue to be weak as people became more aware of what he called “the very bad effects of carbon dioxide” resulting from burning oil and gas.

He said the Covid-19 outbreak was teaching people that health was “a primary concern”.

“Lungs are very important. What you breathe is important. So that’s, I think, a big lesson.

“And the second big lesson is that we don’t mess with nature without some consequence. And this is very much the case here with the virus and climate change is no exception.

“If we don’t do something, we will be hit by some changes that we will not like and will be very difficult to get out of.”

16 replies »

  1. And Lord Browne enters the clan of those who predict oil and gas prices! And he stands as much chance of being correct as jP was when he stated “plenty of cheap oil and gas sloshing around the world” just before the Beast from the East struck!

    One little climate event there. Does Lord Browne know which parts of the world will be in conflict next week, let alone next year?

    But, if he is correct, then oil and gas consumption will rocket once people are consuming, price will remain low for a time until 30% is reduced, before it takes off again. “Green” energy will be unable to compete, and Teslas will look even more expensive!

    • Think he left BP three years before the Gulf of Mexico disaster occurred, but let’s not spoil the narrative with accuracy.

      • Add the “allegedly” to that John, and the narrative seems to be an attempt at something a long way from reality. Not sure how that gets anyone to agree with the sage words bit. Counter-intuitive may be nearer the mark.

        Mind you, Lord Browne doesn’t look to be a very good deal maker now either, when you read The Alchemists. Expect he made up for it in different ways, but a Sage? Perhaps not.

  2. Renewables are no longer competitive the the new world of Cheap Oil, Oil is so cheap in Texas and Oklahoma they are giving it away for free. Try getting renewables, without the huge government subsidy for free.

  3. Empty oil drums are £24 on EBay and at least you can make steel drums and BBQ , as for Browne , he was as popular as a rattlesnake in a lucky dip during the Balcombe protests. I’m sure many of our minnow oil companies will go under soon as they rely on loans and private investors who are already fed up with supporting the lifestyle of CEOs with the cash they are now desperately needing.

  4. No, it is not all about money, Cjr, until the bill arrives on your doorstep! Because that is what happens when debt is being built up at the rate it currently is. Perhaps have a word with the millions of people who hope it is all about money, and it will be made available to keep the businesses going that employ them-including Tesla. (Remembering that Tesla do NOT make a profit, so they rely upon others money.)

    Meanwhile, next week if the Straits of Hormuz are closed you will see a totally different situation in the oil and gas market, and those who commented a few days previously will just say-“ah, that was not within my assessment”.

    Just like the pundit who might quote a landslide for Barcelona, and say a few days later that he/she wasn’t “aware” Messi would be sent off in the first two minutes and then a couple of his team mates would be angered and attack the ref!

    Football results and world oil and gas forward situations might be better served by Mystic Meg who is better suited to the future predictions with some other “experts” looking at the past, which will NOT be replicated in the future. If you think that is incorrect then make a fortune from football pools using pundits choices. Good luck! LOL.

  5. Hi Martin, Interested to read your post. Of course all businesses have to make forecasts – predictions – and often they get them quite wrong, but try they must. Recovery of the oil price will depend on lots of factors, not only the post-virus economic recovery. The most salient fact is that t for the moment oil production grossly exceeds demand and unsold stocks are very high indeed. How long this will take to unwind is unclear and meanwhile companies with relatively high production cost will shut down wells. Investors will suffer and at some point a new wave of investors will arise who are willing and able to take the risk. The race to up production to restore cash flow is occurring but ultimately unsustainable for high cost wells. It takes time and cash to shut down wells, and high cost wells that are either near the end of their production life are likely to be shut down and not reopen. In addition, wells that have got uncertain reserves will either be suspended for a while, or simply shut down permanently. Martin, yes you are right to raise the point of the risk of the Straights of Hormuz. Overall it seems to me that wind farms are the safest bet for long term investors such as pension funds as wind energy is indeed a safe bet in the UK in terms of security of supply as wind energy is close to the UK electric grid and without the Hormuz problem. Regarding footing the bill for the NHS, now is a great time for the Government to slap a temporary NHS Windfall Tax on pump prices for cars, to stabilise the pump prices at a sensible price and pay for much of the costs of the pandemic in the UK. Cheers. Robin Grayson FGS, Liberal Democrat geologist, Manchester.

    • Well, thanks for that Robin. Bit more Lib Dem than geology, but not to worry.

      Of course supply is above demand for oil and gas currently. The same applies to just about every major business sector. Think Tinder have the same issue as well. Lock downs do that.

      Yes, some wells with higher production costs will shut down. They always have and always will. Recently an announcement was made regarding one in the north sea with high production costs, therefore any REALISTIC new UK on shore oil production will NOT add to production. However, looking at recent costings for new on shore UK oil their costs are pretty low. Other areas, such as USA, will support their production costs as they feel they need to. It is not all about money. USA may feel they would rather reduce the military cost of supporting overseas supplies they do not need, and that includes the deaths of their service personnel. I believe Donald already made that point to other nations even before Covid-19. Not supporting Donald, but I know from many American friends that is a strongly held view in USA.

      Wind farms I quite like, off shore. On shore they are often as problematic regarding local democracy as PNR! Either way, they need to be able to supply without the large subsidies they have enjoyed. Equally, the back up issue has still to be solved. If we see cheap gas and oil, then that is the solution in the short term as the huge costs of new nuclear may limit that even further.

      Windfall taxes??!! OMG. If you believe that windfall taxes will be acceptable after Covid-19 then good luck with that. Windfall taxes upon transport costs impact everyone in the UK. For those who have missed seeing distant loved ones for months being handed a windfall tax to achieve that, would be as popular as an increase in students fees. Test it out at the next election, Robin. You may find the “breakthrough” will be another mirage, even when you have a new leader! Goodness, how long does it take?

      • Martyn, an update on wind farms. Onshore they are indeed problematic for democracy, too expensive, too fragmented and often require subsidies. In contrast, the cost of offshore wind energy has dropped remarkably.
        “The UK’s next wave of offshore windfarms will generate clean electricity at no extra cost to consumers after record low-subsidy deals fell below the market price for the first time. New offshore wind projects will power millions of British homes under “zero-subsidy” support contracts within the next four years, following a record-breaking government subsidy auction. …the results of the auction showed offshore wind costs had tumbled by a third to about £40 per megawatt hour, which is less than the price of electricity in the wholesale energy market. This means households will not face extra costs to support the new projects, which may even help to bring down energy bills.”
        It seems to me the answer is blowing in the wind.

        Martyn as for a windfall tax on fuel for cars, it is worth remembering that dirty fuels damage the health of millions of people. Here in Manchester, people are now much more aware of this with clear skies with the sharp drop in air pollution due to lockdown. We have a growing network of electric trams, and green buses entering service on many routes, as well as a remarkable network of cycleways.Not sure I can see how oil fits into the energy mix in Manchester. At least for Manchester UK, if not Manchester USA.
        Robin Grayson, Liberal Democrat Geologist

        • “Not sure how oil fits into the energy mix in Manchester” a “geologist” states! Just wait until the football season re-opens and all those “local” Utd. supporters travel from far and wide across the UK to Old Trafford, let alone those who fly in! Including the owners. Really, Robin, what a load of tosh. If price of oil rocketed to $100/barrel, Manchester UK would be immune? Manchester Airport?

          And, by the way, what about those off shore wind farms where the UK has committed to long term contracts? Not the new wave. So, put the waves together and it is not quite so rosy. Answer blowing in the wind? Hmm. What about the Scottish turbines blowing in the wind but the sub sea transit didn’t work, so consumers were paying a premium to pay for generation of electricity in Scotland that they didn’t receive, but the generators still needed to be paid? Plenty of subsidies still there.

          And no comment about the back up required for wind, and the cost of supplying that. So, yes, more off shore wind but it will remain a source of energy for some time that requires backing up. Going back to the football, there is a problem when you have to have a permanent sub. ready to replace your injury prone centre forward that stops working on a regular basis. However cheap that centre forward might have been, add the cost of the permanent sub., and it starts to look a bit different.

          So, will we see a big increase in purchase of electric cars in Manchester? Not so far, but SUVs, yes. Maybe more subsidies would do the trick? Another tax increase, so okay for Lib. Dems. but they will not be in a position to influence, let alone decide.

          Anyway, the Germans tell us their diesels are clean, and much favoured by the antis.

          Just spotted that BP and Shell shares recovering today. Refracktion must be doing his shopping.

          • Football again Martin? To help your case, “Utd” are actually across the border in Trafford district, and these days Manchester City is often ahead of them in terms of results. If the oil price should rocket to $100/barrel, then of course the temporary Windfall Tax on pump prices would automatically be long gone before then. Meanwhile the NHS would get some of the funding it so desperately needs.

            Tut Martin, in favour of offshore wind energy one minute and then tilting at offshore wind is Quixotic in several respects. Let us take your claim that back up will be required for offshore wind farms. Quite right and currently by dirty diesel generators. But that is changing rapidly beginning in places as far apart as South Australia and Florida with Tesla lithium batteries doing the job instead. When wind blows strong and wind electricity exceeds grid demand, the giant lithium batteries kick in and get charged up with the surplus electricity. Then when the wind drops the Tesla lithium batteries feed the grid. As readers will attest, there is no role for oil and gas in this. Nevertless I hope you will support this trend and even if you don’t like it, well the trend is now happening regardless.

            As for your comments about electric cars and SUVs in Manchester, do remember this is Manchester UK and not Manchester USA. Electric cars are increasing in Manchester as well as dirty diesel buses being scrapped in favour of buses powered by electric batteries, and there is an ongoing programme of upgrading rail services to overhead electric across the region. The electric metro tram system is booming and so too is rail. As for SUVs these remain popular for taking children to school but are now largely banned from the school gates due to gross air pollution from arriving and departing, and especially when splarging filth when keeping their engines running. Meanwhile no matter what the Germans might say, their diesels are commonly fitted with ‘cheat’ devices designed to fake low emissions during tests. I think you are discrediting your case if you beleive them. Finally, of course BP and Shell shares will recover for the time being, but it would be glib to assume anything more than a market correction.

            Just now we are busy reevaluating the geology of promising fracking areas, and its positive and negative impacts on the long-term viability of various onshore PEDL blocks. Will be back in a few weeks once finished. Robin Grayson FGS, Liberal Democrat Geologist

            • Well, Robin, you seem comfortable to quote your professional qualifications and then immediately erode that credibility. I was asked to do that once, so resigned. Best move I ever made. I ended up still employable by the better professional companies, and was, whilst others who made the other choice ended up as consultants.

              Wind backed up by dirty diesel generators? Oh really. So, no need for expensive new nuclear then?

              Electric vehicles? Nope. SUVs STILL much more popular. Indeed, in London many electric vehicles are there because it reduces the cost of travelling into London even though hybrids are usually on petrol long before they arrive! Have a word with the delivery drivers. I have, when I had two delivered. (Tried, tested, and REJECTED.) They will help you out with the reality.

              Glib market corrections? Yes, indeed the market corrects to show demand is down 30%. It will correct initially because of over correction and then as the 30% is removed correct more. The fundamentals do not change because of Covid-19. They remain there, and are reflected as that influence wanes. Many will see an opportunity to claim different. The Lib Dems do that every 4 or 5 years, reality then happens.

              Nope, I do not believe the Germans but your anti colleagues do! Seems they are an essential mode of transport to nip along to PNR and photograph ladies undies in the hope of gaining the £5k best photo prize. Excitement for the antis takes some strange pathways. If you wish, you can also find travel advice upon DoD as to where to park when visiting PNR, and reference to visitors from all over the country-just like Man.Utd!

              And, no, a small scale test is not a trend! (You quote Australia, and then ignore one major reason the last election produced the result it did! Something to do with COAL MINING?) Not enough lithium available to power electric vehicles if they did become popular, let alone the sort of LARGE scale storage that would be needed to link to the level of wind power talked about. Of course, just extend the sub sea mining, that is already underway. But, then that is hushed up, isn’t it? Trashing the oceans not looking after the planet, is it? Just like the poor kids in the DRC with very serious health issues due to contact with cobalt, and still being paid a pittance by the Chinese. Just like the Swansea Lagoon project that depended upon the Lizard being blown up to allow manufacture any where near budget, even though the good people of Cornwall have said “no way”. Lot of collateral damage around certain areas of the alternative sector, including Mr.Musk and his attempt to trash a forest and the German sand lizards, yet conveniently ignored or hushed up-or countered with some fiction about selenium that turned out to be noticeable by it’s absence!

              Also noticed you ignored Manchester Airport. Well, I will allow a bit of speculation to creep in. Once people can vaccinate before their holidays there will be a large increase in travel out of Manchester Airport as the local population treats themselves to some relaxation overseas. Certainly many I speak with are keeping their spirits up by planning their holidays and all the plans I have heard involve at least two flights. (I am the exception. My passport has been allowed to lapse.)

              Good luck with your re-evaluation. If you have difficulty with selenium, maybe awakening the Kraken may be a worthwhile avenue? Could speculate all that naughty Norwegian oil and gas activity could have diverted it into underground waterways?! If red diesel and vegetable oil confusion is the par for the course, that should fit in quite comfortably.

    APRIL 22, 2020 / 01:32 AM / UPDATED 7 MINUTES AGO
    Oil prices hit 1990s low as coronavirus outbreak sinks demand
    TOKYO (Reuters) – Oil prices slumped again on Wednesday, with Brent falling to the lowest since 1999, as the market struggled with a massive crude glut amid a collapse in demand for everything from gasoline to jet fuel caused by the coronavirus outbreak.
    The falls follow two of the wildest days in the history of oil trading, as worldwide supply looks set to overwhelm demand for months to come and current production cuts fall far short of offsetting that glut.
    The front-month U.S. contract fell into negative territory for the first time in history on Monday and set a record for the number of contracts traded on Tuesday.
    Oil prices have slumped by around 80% this year as the pandemic has spread across the world, killing almost 180,000 people, routing financial markets and leading to what could be the worst economic meltdown since the depression of the 1930s.
    The viral outbreak has caused fuel demand to drop by roughly 30% worldwide and energy companies in the United States, the world’s biggest producer, are scrambling to find storage for excess oil.
    “This is a direct result of excessive investment coinciding with a sudden demand shock in a landlocked area with limited storage and transportation,” Goldman Sachs said in a report.
    The volatility in the oil market has prompted CME Group, the world’s biggest commodities exchange, to raise margins on crude oil futures.
    The U.S. Senate on Tuesday approved nearly $500 billion in added support for the U.S. economy and hospitals and will send the measure to the House of Representatives for final passage later this week.
    But there is concern globally that no amount of pump priming will be enough, with business executives preparing for a prolonged slump in demand and many of them worried that their companies won’t survive.
    U.S. crude inventories rose by 13.2 million barrels in the week to April 17 to 500 million barrels, data from industry group the American Petroleum Institute showed on Tuesday. Analysts had expected a build of 13.1 million barrels. EIA/S
    Official government data is due to be released on Wednesday.
    “The U.S. oil system has been shattered by … demand destruction never seen before,” said Matt Stanley, a fuel broker at Star Fuels in Dubai.
    The United States House of Representatives is set to vote on what would be the fourth coronavirus-response law. Taken together, the four measures amount to about $3 trillion in aid since last month to confront a crisis that has killed nearly 45,000 Americans.
    Reporting by Aaron Sheldrick; editing by Richard Pullin and Louise Heavens
    Our Standards: The Thomson Reuters Trust Principles

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