Low Energy.

Energy shares crumbled on Monday, as the market stares blankly into the abyss following a weekend that found the Saudis firing the opening shots in an “all-out” price war aimed at punishing Moscow for Russia’s recalcitrance in Vienna last week.

Exxon fell the most in more than a decade, taking its market cap to a 22-year nadir.

Names like Hess and Schlumberger simply imploded – almost literally. They just flat-out collapsed.

Think of this like a multi-car pileup on the interstate. About all you can do is rubberneck the smoldering wreckage as you drive by, then shrug your shoulders and sigh as you reaccelerate and go on about your trip.

As for oil itself, I spent a good portion of the weekend documenting what transpired, and also illustrating the immediate fallout from Saturday’s dramatic OSP cuts from Aramco. For anyone who missed it, these visuals capture the depths of the chaos:

WTI fell as much as 34% at one juncture to $27.34.

In addition to the Saudis tipping plans to ramp production over the weekend, Rosneft PJSC will start pumping more starting next month too, sources said. Volatility absolutely skyrocketed:

“At its core, the decision from Russia to unwind the artificial price support that OPEC+ had created since 2016 is rational”, Goldman writes, noting that “these cuts to defend prices instead of market share defied the economic incentive of large low-cost producers without pricing power, with Russia’s economy able to cope with lower oil prices”.

As you’re probably aware by now, Putin is said to be displeased with the Trump administration’s ongoing crusade against the NordStream 2 project and recent sanctions on Rosneft didn’t help.

When it comes to price levels around $30/bbl (Brent), Goldman says that will “start creating acute financial stress and declining production from shale as well as other high cost producers”.

The bank goes on to offer the following rather dour outlook (I mentioned this on Sunday, but things were moving a bit too fast to delve into the specifics):

Specifically, we assume legacy production decline rates outside of core-OPEC, Russia and shale increase by 3% to 5% to return to their 2016 highs. In the case of shale, we assume a negligible response in 2Q but with production falling sequentially in 3Q by 75 kb/d and with declines increasing to 250 kb/d qoq in 4Q20. This will not, however, prevent a 3Q20 surplus of 1.2 mb/d and inventories peaking above their 2016 highs and Brent spot prices staying at $30/bbl on average. In fact the negative feedback loop of lower oil prices on energy exporting economies could exacerbate the decline in oil demand. At that point, the fundamental rebalancing could require oil prices falling to operational stress levels for high cost producers with well-head cash costs near $20/bbl.

As far as the credit ramifications go, Goldman suggests that the shakeout could come quickly.

“We expect a much faster rebalancing this time around as shale and high-cost oil producers were already facing sharply higher costs of capital over the past year due to persistently poor shareholder returns”, the bank says, adding that “as of last Thursday before the collapse of the OPEC+ agreement, US HY Energy credit spreads were already above 1000 bps, a level they had last traded at in March 2016 when WTI prices were trading at $35/bbl”.


When it comes to the actual price action in crude, Nomura’s Charlie McElligott had a characteristically colorful take on Monday that touches on the gamma effects which exacerbated the Q4 2018 oil collapse.

“Crude is particularly exposed to negative gamma shocks due the inherent and massive ‘commercial’ nature of (downside) hedgers in the space”, he wrote, in a morning note, adding that “on top of already being an illiquid mess in the futures contract, imagine being a market maker who has sold puts to major E&Ps and was already staring into the abyss after the last two weeks’ -25% move [and] now having to sell futures deep in-the-hole of the reopen gap lower last night / today”.


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