The West Texas Intermediate (WTI) price drop is not reflective of the oil and gas industry worldwide but is very specifically driven by the production and demand imbalance in the United States.
That’s what Aberdeen-based Derek Leith, EY’s Global Lead for Oil and Gas Tax, said in a statement sent to Rigzone on Tuesday.
“Most of the production is land-locked, and with storage facilities close to maximum capacity a further fall in the U.S. benchmark crude, WTI, was inevitable,” Leith told Rigzone.
The EY representative outlined that the “headline-grabbing” oil price of -$40 per barrel was driven by a “relatively small” number of May contracts held by financial traders having to be sold before they expired and the sellers finding there were “absolutely no buyers”.
Leith went on to say that the OPEC+ supply cuts will “shift things in the right direction” but highlighted that these do not start until May 1.
“In the medium term this action should be enough to rebalance the relationship between supply and demand as global demand will increase as the Covid-19 lockdown comes to an end,” Leith stated.
“However, we should expect a lot of volatility over the next couple of months and for crude prices to sit in the lower range as we experience a supply overhang of as much as 15 million barrels a day,” he added.
WTI Plunge Stark Reminder of Volatility
Leith warned that, while Monday’s plunging WTI price won’t directly impact the UK Continental Shelf (UKCS), it’s a “stark reminder” of oil price volatility and that smaller UKCS producers may find it “very hard” to sell their crude at the “prevailing market rate”.
“The oil field services sector hasn’t recovered from the 2014 fall in oil price and this has been compounded by the current low-demand environment,” Leith stated.
“There is likely to be a renewed focus and rigour on decreasing operational costs, particularly for smaller players,” he added.
“The companies which respond quickly, are agile and carefully strategic are likely to emerge in a better position in the medium and long-term,” Leith went on to say.
EY is a professional services company with more than 700 office locations in over 150 countries. The business specializes in several sectors, including oil and gas.
To contact the author, email andreas.exarheas@rigzone.com
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