Analysis: US crude oil price collapses as stocks near capacity
This morning’s collapse in the price of West Texas crude oil has left investors speculating whether US president Donald Trump might bail out the struggling shale industry, which has been decimated by the coronavirus crisis.
The US benchmark crude fell below $15 today, its lowest level in 21 years, amid fears that production would have to be halted due to storage space rapidly running out.
Despite last week’s record production cuts by oil cartel Opec, the US shale market has continued to plunge due to a complete collapse in fuel demand, leading to speculation that the White House might act to protect the industry.
Michael Hewson, chief markets analyst at CMC Markets, said that the price collapse might force smaller shale producers, which have a breakeven price of $40 per barrel, out of business unless action is taken:
“The collapse in prices has also prompted some speculation that the US administration might look at paying oil producers to keep oil in the ground, and help stave off the bankruptcy of some of the smaller producers, which would saddle several US banks with large losses.
“In an election year this is likely to be a huge temptation for President Trump, however even he has to admit propping up unprofitable companies only delays the inevitable, and wouldn’t solve the underlying problem of a lack of demand, and the global move to renewables”, he said.
Sign up to City PM’s Midday Update newsletter, delivered to your inbox every lunchtime
The alternative, said markets.com analyst David Madden, is that states agree their own output curbs with producers:
“No one wants to take delivery of oil now and the hope is that US regulators in states like Texas can agree on controlled production cuts”.
He added that benchmark Brent crude has not seen the same collapse due to a better storage situation.
There are around 9,000 domestic oil and gas companies in the US, which means that implementing an industry wide production curb is a deeply challenging proposition.
According to the latest figures from analysts Baker Hughes, the number of operating rigs in the US now stands at 438, a 35 per cent fall on the previous month.
Trump’s reelection is likely to hinge on oil states such as Texas, Ohio and Pennsylvania, further complicating an already murky picture.