Page 15 - ISQ UK Aprl 2020

INVESTMENT STRATEGY QUARTERLY

Drop in Oil Demand

-1.5%

-1.0%

“
An oil price war between
Saudi Arabia and Russia emerged
suddenly and dramatically on 7

-0.5% March, compounding the already
ultra-bearish demand backdrop. ”

0.0%
2008 & 2009 2020

Source: Raymond James Equity Research as of 20/03/2020

In the short run, oil market conditions will surely be volatile. The So, how is the oil industry handling this exceptionally difficult
floor during the 2014-2016 oil down cycle had been set when period? What practically every oil producer is currently focused on,
numerous data points began to emerge about higher-cost/lower- as the first line of defence, is cutting capital spending. In many
margin oil producers physically shutting down wells. Plenty of the cases, they are cutting quite sharply, by 30% or even more, as
world’s oil trades at hefty discounts relative to the light sweet compared to the initial budgets from January/February. Some
benchmarks, so the point at which marginal cost begins to exceed reductions in corporate costs are also inevitable, and a limited
marginal revenue at certain oilfields is closer than it might seem at number of companies will cut or suspend dividends. The main
first glance. West Texas Intermediate (WTI) crude stayed under $40/ driver will be to slow drilling activity and postpone projects. By
Bbl for approximately 100 days (from December 2015 through responding rapidly in this way, the large, investment-grade
March 2016). Its absolute bottom was $26/Bbl in February 2016. companies will be able to steer themselves through this period. In
This time, the degree of oversupply is much worse, so it stands to fact, they may even benefit - over a long-term timeframe - by taking
reason that the trough will also be lower. We think that WTI will test advantage of this crisis as an opportunity to pick up cheap,
the $20/Bbl level in the second quarter of 2020 – the lowest since distressed assets when some of the smaller players with excessive
1999 – averaging $25/Bbl for the quarter. After that, we forecast a leverage end up going through bankruptcy.
V-shaped bounce to $45/Bbl in the fourth quarter and then a slower
recovery to an average of $55/Bbl in 2021.

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