Crude Oil Below $20, Trump Needs To Save U.S. Shale Oil Industry

It was another brutal day for oil prices; Crude Oil crashed another 10% yesterday. In fact, since the oil production cut this week—which was supposed to help oil prices—the selling pressure has been building. OPEC+ has done its job, and it would be foolish to expect any more production cuts from Saudi Arabia or Russia. Remember, initially, Russia wasn’t ready for the production cut, and then the oil war was extended by Saudi Arabia. Eventually, we saw an agreement forged, and the OPEC+ alliance settled for a production cut just shy of ten million barrels a day.

Donald Trump was proud that he forged a deal between Saudi Arabia and Russia, however, the president’s only goal was to save the U.S.  oil industry and its jobs. The Saudis and Russians are done with their production cuts, and it is highly unlikely that we will hear any more from them, even if prices stay at the current level.

OPEC+ has always wanted the U.S. shale oil industry to make organic cuts, but oil production cuts from the U.S. shale oil industry are based on CAPEX cuts from energy companies. This type of production cut isn’t enough to aid the oil demand shock. Given the current climate, we need an organic oil production cut.

There is no doubt that countries are busy increasing their strategic reserves. According to Saudi Energy Minister, Prince Abdulaziz bin Salman, countries can increase their SPR by 200 million barrels over the next couple of months.

There are also signs that demand is picking up in China; various sources such as TomTom show that motor traffic has increased enormously after the lockdown ended. Oil consumption has increased, but we are still far from pre-coronavirus levels. Similarly, air traffic data and seat occupancy rates are also beginning to improve. Chinese refineries have also started to operate at a much better level; some are even at 70%.

The fact is that the global lockdown may not ease off for another 2-3 weeks, and it will take another two months or so before we see the world begin to return to normal. So, it’s likely oil demand will remain depressed for some time.

Crude Oil prices are way oversold, and near their support level, which may attract some bargain hunters. However, it will take another four weeks for China to start consuming an amount of oil that can be classified as pre-crisis level—and this is an optimistic picture. Therefore, bargain hunting has limited scope for the price.

The bottom line is that if oil prices stay below the $30 mark or decrease further, below the $25 mark, the rate of bankruptcies in the U.S. shale oil industry will begin to spiral. The only thing that can save the industry now is an organic oil production cut by the U.S. shale oil industry itself.

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