US oil prices are back in the neighborhood of $20 a barrel. And they’re showing every sign of going lower as COVID-19 fallout depresses demand and Saudi Arabia ramps up output like there’s no tomorrow.
Natural gas prices, meanwhile, have sagged under $1.70 per thousand cubic foot. They may catch a break on the supply front this year, as cutbacks of shale oil production reduce output of associated natural gas. But that may be more than offset by sagging demand, should efforts to reduce COVID-19’s spread result in a big drop in electricity usage.
The bottom line is energy producers are facing their worst operating environment since the early ‘00s. And unlike the last time prices dipped in 2015-16, their list of allies on Wall Street grows thin, all but cutting them off from economic outside financing. In effect, they’re on their own to generate the cash they need to operate.
The result is an ongoing great downward reset in producers’ guidance for capital spending, oil and gas production and cash flow for 2020, which in all likelihood will extend into 2021. And the result is big changes in the strategies up and down the energy value chain that were working well earlier this year. Those include eliminating share buybacks, slowing debt reduction and dividend cuts.
We’re still in early stages. But it’s clear even the energy industry’s largest and strongest companies will have to make adjustments, possibly big ones.
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Elliott and Roger on Jul. 20, 2020
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