With the West Texas Intermediate benchmark crashing below $0 for the first time yesterday to reach -$40 a barrel and global oil markets remaining under pressure today, asset managers have commented to note that further production cuts will be needed for the oil price to rebound, and that low prices spell winners and losers.
Sébastien Galy, senior macro strategist at Nordea Asset Management, said yesterday’s WTI drop – which made for a “historic day” in the oil market – was likely connected to storage issues, as people consume far less amid the quarantines and lockdowns, and to credit risk.
“In the coming days and weeks, we will see increased pressure for another deal with OPEC+ and to reduce overall global production, potentially involving the Americans,” he said. ‘test’
“This could eventually have a huge impact on oil prices. The opportunity set for fund managers is vast, particularly in emerging markets, and the dynamics of oil prices mean some agility in rebalancing portfolios will be required.”
Nadège Dufossé, deputy global head of multi-asset at Candriam, said that for the oil price to rebound there would need to be higher production cuts from 1 May, “as well as better perspectives on demand increase that should follow the easing of lockdown in various countries.”
At PGIM, David Winans, credit analyst for the fixed income division’s US investment grade credit research team, said yesterday’s price move, although “very painful”, could not last for long “since producers are switching off wells as we speak”.
“The ‘supply shock’ from the OPEC+ collapse in March was really a mirage, the demand shock from COVID-19 is overwhelming everything,” he added. “Ultimately, the path for oil prices is going to follow the path of this virus. Until demand shows some sign of life, oil prices will likely remain on life support.”
Winners and losers
Audra Delport, deputy head of credit research at Federated Hermes, said the the impact of low oil prices would be mostly felt in the US high yield energy sector, although it would vary depending on the quality of the producers.
“In addition, the reduced oil production in response to lower prices will benefit natural gas producers as associated-gas production in the US declines in the upcoming months, driving natural gas prices higher,” she said.
“Overall, companies that have scale and additional levers to pull such as dividend reductions, growth capital expenditures and asset sales will be better off, while smaller higher cost producers with upcoming debt maturities will be most impacted.”
Nordea’s Galy referred to winners and losers when noting that the generally much lower oil prices “translates into a transfer of wealth from Russia, Saudi Arabia and allies to the rest of the world”.
Florence Pisani, global head of economic research at Candriam, said: “The current developments validate the Saudi strategy: the price collapse will eliminate many US producers from the market, forcing the US to contribute to the downward adjustment of world production.”
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