COVID-19, Price Wars, and Commodity Prices

These are strange times. The combination of reduced global oil demand caused by the coronavirus pandemic, and production increases from the Saudi/Russian price war, is causing a massive over-supply of crude that has abruptly driven down oil prices. The consequences will not be short-term. All mineral owners (including us) should be aware of the following effects on their mineral interests:

  • The recovery of oil & gas prices will lag the broader economic recovery. The over-production of crude by the Russia/Saudi Arabia price war is bloating oil inventories, and will depress prices for the next 1–3 years (possibly longer).
  • Royalty checks received this month reflect oil prices that are 1–2 months old ($50–$60). Checks received in May or June may be 50% less, as they will reflect current oil prices.
  • Low oil prices are causing serious financial problems for oil companies and, along with general uncertainty in the industry, will force many into bankruptcy, casting doubt on the outcomes of their planned drilling opportunities.
  • Drilling activity will drop dramatically over the next few years as oil companies have less cash to spend. Operators will tend to drill their best acreage now, leaving their other acreage for when oil prices return to normal.