Oil Industry in Crisis: Desperate Attempts to Avoid Collapse Due to Coronavirus Impact
In a historic move, the world's biggest oil producers have agreed to slash the global oil output by some 15% over the next few months. This decision comes amidst a significant drop in oil prices, which are now at their cheapest since the beginning of America's war against Iraq in 2003.
The agreement, which involves countries such as Saudi Arabia, Russia, Algeria, Iraq, Kazakhstan, Oman, the United Arab Emirates, and others, is part of the OPEC+ coalition. Notably, the United States is also among the countries participating in this agreement, marking a significant shift in global oil politics.
The drop in oil production is expected to be seven times bigger than the previous largest quarterly decline following the 2008 economic crash, according to data by consultancy IHS Markit. By the end of March, approximately 30 million barrels per day (bpd) of oil production had stopped, representing a third of the global oil production.
One of the countries that has been affected by this decision is Mexico. Initially unwilling to accept a cut of some 400,000 bpd, Mexico agreed after US President Trump personally offered to make extra US cuts. As a result, Mexico's portion of the oil output cut was reduced to only 150,000 bpd.
The oil price crash is expected to lead to widespread consolidation in the industry. Companies are struggling to cope with the financial strain, and some have already felt the impact. For instance, Whiting Petroleum, a Denver-based producer, filed for bankruptcy on April Fools Day after "Well-Street" refused to loan it more capital.
The financial strain is also evident in the market valuations of major oil companies. Companies like ExxonMobil have seen their market valuations nearly halved due to the oil price crash.
Goldman Sachs has warned that after the downturn, big shale's "capital constraints," debt, and structural disadvantages will remain. This suggests that the oil industry may face a long and challenging road to recovery.
In conclusion, the decision by global oil producers to slash output is a significant step towards addressing the current oil price crisis. However, the long-term effects of this decision, particularly on the financial health of oil companies and the global economy, remain to be seen.
