The US shale industry may collapse due to a plunge in the price of oil because of the coronavirus pandemic, according to an influential report.
“The sharp fall in oil prices will affect political regimes in the Middle East, especially in Saudi Arabia, Iraq and Iran, which may result in the collapse of the shale oil industry in the US, unless oil prices return to their prior levels,” said the Australian Institute for Economics & Peace.
The report issued by the Sidney-based think tank also highlighted that the price of oil & gas credit default swaps, insurance policies that protect investors against the default of corporate bond issuers, increased significantly, pointing to concerns about the future of companies in this sector in a low oil price environment.
Oil prices have recovered significantly since hitting their bottom in late April, when the price of crude fell to negative territory as a result of an oil glut and a severely limited global storage capacity. So far, crude prices are near the $40 level, jumping by more than 200% since then.
Meanwhile, oil futures are falling for the second consecutive session today after the WTI, the US oil benchmark, lost 1.8% of its value yesterday, closing at $38.23, while the Brent, the global oil benchmark, slide by 1.5% to end the session slightly above $40.
This report is in line with a note from US investment bank Goldman Sachs, which said on Tuesday that the price of crude oil is set to fall in the next few weeks.
The US bank said: “The collapse in refining margins to unprecedented lows is reflective of both over-valued crude prices as well as a more moderate demand recovery, two pillars of our short-term bearish view.”
The note added, that the recent rebound “has been fueled by a macro risk-on backdrop and a policy-induced Chinese crude import binge, yet fundamentals are turning bearish”.