The current oil market situation is offering tanker owners many opportunities to raise their earnings and revenues. However, the long-term consequences could be less ideal, especially if many oil companies go underwater.
In its latest weekly report, shipbroker Gibson said that ” restrictions on the movement of people as the COVID-19 virus has spread globally. This has been compounded by the rapid rise in crude flooding the market from Saudi Arabia and other Middle East producers as they try to increase market share after the OPEC+ talks broke down in March. The sudden drop in Brent oil prices from $68/bbl to $22/bbl forced many companies to reassess their spending plans, as this was seen as more than just a dip in prices, but potentially a longer-term downward movement until OPEC+ come to some agreement on future production levels that would provide a more sustainable price environment”.
According to Gibson, “this also comes at a time when oil companies have become overexposed with debt. Chevron, Total, BP, Exxon Mobile and Royal Dutch Shell reported a debt load of $231 billion in 2019, just shy of the $235 billion hit in 2016 when oil prices also tumbled below $30 a barrel. With Brent currently at $28/bbl, the big oil companies have started to make contingency plans. Shell was one of the first companies to announce that it would cut CAPEX by $5 billion to $20 billion during 2020. This was followed by Chevron, with a $4 billion cut in its expenditure, to $16 billion. Exxon Mobil will cut $3 billion from its spending to $30 billion. Total will cut $3 billion from its spending. The drop in oil prices has not just impacted the IOCs. Saudi Aramco has recently announced a CAPEX cut of $5 billion, with a new 2020 spending target between $25-$30 billion. Other companies such as BP, Eni, Equinor, Kosmo Energy and Santos are all reviewing their spending budgets for the year ahead and further into the future”.
The shipbroker added that “the falling oil price has also impacted the smaller shale producers in the US, which is an industry that is super sensitive to prevailing global oil prices. In the US, Whiting Petroleum Corp has recently filed for bankruptcy, while Devon Energy Corp. is reducing its expenditure by 45% compared to its original 2020 budget. With at least $20 billion trimmed from the CAPEX budget from the largest oil companies, the implications of these decisions may not be felt immediately. The oil industry is a capital intensive sector that has had to pay high dividends to attract investors. This means that big oil is in a ‘Catch 22’ situation, whereby to invest in more exploration, production and refining, they require more capital but to attract the capital they will need to guarantee positive dividends. The only way they have been able to do both is to build up large amounts of debt. It now seems that this business model is under increased pressure as investors seek real change within the sector”, Gibson said.
From a tanker perspective, the past two months have been a testing period, from low and steady to rocketing rates in a matter of weeks. Currently, the impact of both the Coronavirus and the massive ramp-up in Saudi crude exports has been such a shock to the underlying global economic model that these alone will be discussed and analyzed for years to come. But once all this has blown over, the very real and more long-term implications of the oil companies’ reduced CAPEX budgets will have consequences on the tanker market in the coming years”, Gibson concluded.
Source: Nikos Roussanoglou, Hellenic Shipping News Worldwide