US oil price drop signals blow for North Sea industry, warns OGUK
The oil and gas industry in the UK is calling for further support after US crude oil prices dropped below zero dollars for the first time ever.
West Texas intermediate (WTI) oil slumped to minus $37 on Monday night as a lack of storage space meant firms paying to offload barrels.
Brent crude oil – the benchmark for North Sea oil prices – traded at just over $25 a barrel at the same time, but the UK industry warned it would not escape the impact of the huge drop in demand being felt due to the coronavirus-related lockdown.
Oil and Gas UK, the representative body for the UK’s offshore oil and gas sector, said the oil price developments could fundamentally undermine the ability of the industry to recover and serve the energy transition.
It warned that, while WTI is a localised trading market in the US, it remains concerned about the continued low prices of Brent crude.
OGUK chief executive Deirdre Michie said: “While we have anticipated continued pressures on oil markets, there’s no getting away from the fact that this situation is a body blow for an industry already creaking under the strains of the impact of Covid-19 and sustained low commodity prices.
“The dynamics of this US market are different from those directly driving UK produced Brent, but we will not escape the impact.
"Ours is not just a trading market; every penny lost spells more uncertainty over jobs, our contribution to public services and to the just transition we all want to see. OGUK will be pressing the case for a Covid-19 resilience package to governments in the coming days which will focus on protecting the supply chain, jobs and our ability to continue to reposition ourselves for the future.”
Analysis
By Andrew Bradshaw, head of energy insight at Fifth Ring
Yesterday’s historic fall in West Texas Intermediate prices was due to a combination of over supply, a lack of storage in the US and because it was settlement day for forward contracts in May. While the dynamics for Brent are different, we have seen Brent prices fall this morning and the situation is changing by the hour.
These are very concerning times for those working in the oil and gas industry, either directly or in the supply chain. In the short term, further production cuts by OPEC+ and the G20 countries would be an answer, and as the economy starts to move again and people start to travel, oil demand will increase.
However, longer term, with oil economics now driven more by demand than supply, companies may have to review their business models in terms of new geographic and sector markets as I mentioned in my column in last month’s Energy North.
It’s also worth noting that low oil prices affect the energy industry as a whole, including the renewables sector, where an abundance of cheap oil may impact the development of renewable schemes.
