Oil stocks smashed at midday trade

THERE is no good news for oil and gas companies trading on the Australian Securities Exchange today with the S&P/ASX200 down 5.4% and All Ords down 6.1%.
Oil stocks smashed at midday trade Oil stocks smashed at midday trade Oil stocks smashed at midday trade Oil stocks smashed at midday trade Oil stocks smashed at midday trade


Paul Hunt

Senior Journalist: Energy & Commodities

Paul Hunt


At 11am Australian investors are staring at plummeting stock, with Origin Energy down 13%, Oil Search down nearly 26%, Woodside falling more than 18%, Santos down 25.7% and Beach Energy down 20.78%.

Even Otto Energy, which sought to reassure shareholders of its hedging program, saw a haircut of nearly 30%.

Otto said 61% of its oil production is hedged through to 2022. Its 2020 production is hedged at US$56.71/bbl.

This did not stop investors selling their shares though.

The entire S&P/ASX200 energy sector was trading down 20.75% at this morning. That is a fall of 1561.4 points.

It comes as Saudi Arabia slashed oil prices and amid concerns over the economic impact of the novel coronavirus COVID-19.

This morning ANZ Research went so far as to call the OPEC+ alliance "dead."

"There is no doubt that prices will come under pressure in coming days as the market contemplates the impact of a major supply and demand shock," ANZ said in a commodity insight this morning.

"We expect crude oil prices could test levels not seen since 2016 in the short term."

Feverish bear market swipes oil price over weekend

Brent nosedived more than 10% over the weekend, after the OPEC+ alliance meeting fell apart due to Russia's stubborn position to reject a plan for additional output cuts.

Prices then fell to their lowest levels in over a decade on Saturday Australian time, and analysts are warning Brent could fall even further to around US$40 a barrel.

It suffered its biggest single-day loss since 2018 and fell 9% to just US$45.27/bbl. The US West Texas Intermediate price also tumbled more than 10% to $41.28/bbl.

Analyst firm Wood Mackenzie said late Friday that the market was facing a "spectre of unrestrained production" once the current OPEC+ agreement expires at the end of this month.

WoodMac head of macro oils Ann-Louise Hittle said the failure of OPEC+ to come to consensus was a "psychological blow to the market."

"A sustained bout of low oil prices will further reduce cash flow and investment into the US oil patch," Hittle said.

"It takes at least six to nine months for reductions in spend to lead to lower oil production in the US Lower 48. In that time, their access to capital may be limited and their free cash flow badly hit." 

OPEC had hoped Russia would come to the table and agree to an additional cut to an overall output of 1.5 million barrels to the end of the year.

Non-OPEC members, including Russia, were expected to contribute to output cuts of 500,000 barrels.

In February the cartel flagged production adjustments in response to market instability over the coronavirus COVID-19 epidemic.

The OPEC+ group could be forced to call an emergency meeting during the second quarter if oil prices continue to fall.

The outlook is gloomy, according to other analysts from Rystad Energy, which predicted a no-deal scenario.

Rystad forecasts that failure to come to an agreement will result in a huge surplus of 1.8 million bopd for liquids in the second quarter of 2020, and 1.9MMbopd for crude.

The firm believes Brent prices to sit at around the US$40 mark in the short term.

Australia's Santos has previously said it could survive at US$40/bbl but would need a higher price of US$60 to fund growth projects.

Oil-linked LNG hit will impact exploration

EnergyQuest's latest report of Friday unsurprisingly echoed other analysts, finding that COVID-19 would have an impact on Australian energy exports given most of the nationals LNG is sold via long-term oil-linked contracts.

So far, LNG watchers have been more concerned with the historic low prices in Asian spot market and general dampened demand in after warmer Northern hemisphere winters. 

However, with oil predicted to stay lower-for-longer, and the price of Brent now below US$50 per barrel means gas exporters are facing severe revenue drops. 

"Most Australian producers and projects are still viable at oil prices in the US$50s but the price fall cuts into the cash flow available for investment and/or dividends," EnergyQuest said.