Oil sector faces collapse

It has “barely been a week” since President Donald Trump sealed what seemed a “rare diplomatic victory” by getting major oil producers to cut as much as 15 million barrels a day of global output, says Spencer Jakab in The Wall Street Journal. But the effort has failed to boost long-term prices, while the spot price of US crude has turned negative on fears that storage capacity will soon be exhausted. As the shares of oil producers plummet there are now concerns that this “systemic failure” in the oil market will force American producers to turn off the taps for good.

Oil-field services behemoth Halliburton and producers Marathon Oil and Occidental Petroleum have already “lost more than two-thirds of their value”, says Dino Grandoni in The Washington Post. Many more “smaller, debt-saddled” shale producers are even more vulnerable to going under. As a result, President Trump is now considering “an array of policy tools” to help save energy jobs and companies, including buying surplus oil to fill the nation’s Strategic Petroleum Reserve and even turning away tankers carrying Saudi oil from America’s ports. However, the idea of a bailout for oil companies remains controversial.

A broken business model

A bailout might be tempting, given that energy is an “important driver of investment” and Trump will be wary of the popular backlash that could come from a surge in oil sector layoffs, says Megan Greene in the Financial Times. However, the business model of many oil companies, which involved borrowing large sums of money to finance marginally profitable projects, was “broken before oil prices fell”; any bailout would “throw good money after bad”. Worse, it might delay the “productivity gains and consolidation” needed to make the industry consistently profitable by reducing both financing and production costs.

While many American producers are on the ropes, the key issue on this side of the Atlantic is whether the dividends of BP and Shell, whose projected payouts comprise a third of expected UK dividends this year, are safe. Earlier this week the story was that even if oil remains around $30 per barrel, the payouts were set to continue throughout next year due to declining production costs and spending cuts. With Brent crude falling below $20 on Wednesday, however, the pressure is mounting. 

Oil firms with “break-even prices above $40 a barrel, which is pretty much all of them, will be burning through cash extremely quickly, unless they take further measures to cut costs”, Michael Hewson of CMC Markets UK told Citywire. If the slump drags on they may have to review their long-term priorities. “There will come a point,” Hargreaves Lansdown’s Nicholas Hyett told City AM, “where they will have to choose between their expensive low-emissions energy plans and continuing to pay their dividends”.