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Sanctions, Stimuli And COVID-19: Today's Oil News

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Sanctions, Stimuli And COVID-19: Today's Oil News

Since the U.S. introduced nuclear-related sanctions in 2018, production has stalled at more than 25% of Iran’s oil rigs, according to a Reuters report. Of the state’s 160 rigs, about 40 stand idle or require repair.

The sanctions depressed global demand of Iranian oil and led the state to halve its oil output to fewer than 2 million barrels per day. At the same time, they prevented producers from importing spare parts to maintain damaged rigs.

The resulting latency could stunt Iran’s oil industry in the long run by limiting the life-time production of older fields that require maintenance through constant pumping. By Reuters’ assessment, Iran could suffer delays in returning to pre-sanction production levels once normal trade relations resume.

COVID-19

Notably, sanctions aren’t the industry’s only — or even most pressing — concern.

The coronavirus outbreak has depressed oil demand worldwide as drivers curtail travel and the industry’s largest consumers — airlines and maritime companies — ground or dock their fleets. Lower demand means lower oil prices.

To buffer falling prices, OPEC members and Russian oil producers met last week to negotiate production cuts. Failed negotiations led Saudi Arabia to pressure peer cooperation by cutting oil prices by $6 to $8 per barrel and accelerating production. The industry leader suggested the May-June OPEC+ meeting may be postponed if major actors cannot agree on measures to combat coronavirus impacts.

“I fail to see the wisdom for holding meetings in May-June that would only demonstrate our failure in attending to what we should have done in a crisis like this and taking the necessary measures,” Saudi Prince Abdulaziz bin Salman told Reuters.

The Russian Energy Ministry will convene a Wednesday meeting with domestic oil companies to determine the country’s interest in cooperating with OPEC. “We plan to discuss whether to return to (cooperation with) OPEC or not,” an insider told Reuters.

The conflict triggered the largest oil-industry decline in nearly three decades this week, with both Brent crude LCOc1 and West Texas Intermediate benchmarks falling 25% on Monday. Market analysts said the drop in oil prices would require energy companies to return billions to investors through delays in share buybacks or rollouts of non-cash dividends.

“Buybacks and dividend growth are now almost certainly off the table, and questions on who will need to cut the dividend first will be topical,” Jefferies analyst Jason Gammel wrote, according to Reuters.

Exxon Mobil Corporation (NYSE: XOM), Eni SpA (NYSE: E), Total SA (NYSE: TOT), Equinor ASA (NYSE: EQNR) and other energy plays caught downgrades.

Stimuli

The industry benchmarks recovered 10% Tuesday as the U.S. and Japan announced stimulus packages to buoy their coronavirus-riddled economies, but uncertainty still plagues the sector.

“Price wars and pandemics are nothing new to the commodity markets, but both occurring simultaneously is something we have yet to witness in our careers,” RBC analysts wrote in a note covered by Reuters. “Such action will test the market’s self-balancing mechanism absent the backstop of OPEC, a mechanism that has not been tested since the U.S. shale boom was in its infancy.”

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