The oil price rout this week may be a chance for the industry to restructure and could ultimately be a positive for the market, a strategist said on Wednesday.

Saudi Arabia, Russia oil dispute is about the ‘restructuring of supply,’ says a strategist- oil and gas 360

Source: CNBC

The oil markets tanked Monday, plunging over 20% following a disagreement on production cuts between OPEC and its allies. Russia declined to lower output last week, and Saudi Arabia announced Saturday that it will offer discounts to its official selling prices next month. The kingdom is also reportedly planning to raise production.

Benchmark international Brent crude oil futures were trading around $37 a barrel on Wednesday afternoon in Asia. Benchmark U.S. West Texas Intermediate crude oil futures were around $34 a barrel. Both grades were trading above $40 a barrel last week.

Despite the depressed prices, the response from Saudi Arabia and Russia is “long-term rational” for them, said Damien Courvalin, head of energy research at Goldman Sachs.

Low-cost producers like Saudi Arabia have been supporting prices for years through supply cuts — which in turn boosted higher-cost producers like shale companies in the U.S. and enabled even greater output from the shale producers.

The latest market developments will allow for the restructuring and rebalancing of supply to take place, Courvalin told CNBC, who expects oil prices to stay low — around $30 a barrel for Brent crude — for two quarters.

“This is more about a restructuring of supply — less activity by high-cost producers for low-cost producers to roll,” said Courvalin.

And there will be a point at which there will be a “material change” in the landscape where overall production would fall due to low prices. A higher price for crude will then emerge as supply falls.

“A couple of quarters of $30 is of course, painful for those (major) producers,” said Courvalin, as Saudi Arabia and Russia both sell below cost. But they will gain market share.

The transition period will eventually lead to a smaller fiscal deficit for Saudi Arabia, and higher net revenue in 2021 for both Saudi and Russia, he said.

“That transition delivers beneficial economic gains even a year from now, so I think that’s the important part to focus on,” said Courvalin. “Yes, there is a lower price. It has negative impact, much more so on those high-cost producers than those low-cost producers. But it is, for the long-term, an economic benefit ultimately,” said Courvalin.

The industry restructuring will also benefit the U.S. marketplace in the long-term too, as shale production in the U.S. is more expensive than oil production in other countries. This will allow the shale sector to adjust in order to benefit shareholders and in turn the U.S. economy, he added.

There has been a lack of investor appetite in the shale sector “despite the significant production growth that we’ve seen at artificially supported prices,” he said. “The sector really hasn’t delivered economic growth and shareholder returns.”

Legal Notice