Is the Worst Over for Oil?

2020 was unkind to the oil and gas industry, with more than 40 US-based companies filing for bankruptcy protection between January and November. Their collective debt surpassed US$24 billion, according to a report issued by international corporate law firm Haynes & Boone. Now, analysts are optimistic the worst could have passed for the oil and gas sector.

As the pandemic gained momentum in March 2020, Bloomberg Intelligence valued the number of oil and gas bonds trading at distressed levels at an alarming US$144 billion. By the end of November, the figure had dropped to around US$37 billion. In 2021 analysts are hopefully oil and gas companies will continue to recover from the aftermath of the pandemic, resulting in fewer bankruptcies and a leaner and more robust industry.

“The weakest have been culled from the herd,” says Spencer Cutter, a Bloomberg Intelligence analyst. “Most of the remaining companies may not be making much or any money with oil at $45 and natural gas below $2.75, but they have the liquidity to ride things out for awhile.”

Carving a leaner and more robust industry

The cull has been compared to the shale boom of 2014 which forced many oil and gas companies to sink or swim. Those that could not stay afloat were plunged into bankruptcy, leaving the survivors to reap the rewards. A similar trend could emerge in 2021, with producers currently enjoying WTI prices of around US$51. Brent crude has also climbed to around US$56 per barrel, a significant climb from the US $34 low seen in March. American multinational investment bank and financial services company Goldman Sachs is confident growth will continue, with analysts predicting Brent crude prices of around US$65 per barrel in 2021.

Mutant COVID-19 strains spark concern

While spirits remain high, the bullish view has been challenged by recent production cuts from the Saudis. The announcements came after mutant COVID-19 strains in the UK and South Africa forced the countries back into lockdown. Cases in the United States are also on the rise, with new infections surging to almost 290,000 in the space of 24 hours. As well as escalating the global health crisis, the highly infectious strains have once again sparked concerned over demand slumps caused by the shutdown of major economies.

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