Oil prices may drop below $US10 a barrel in market mayhem

While Australian oil and gas producers have not yet indicated spending cutbacks, North American producers last week announced some $US8.3 billion ($13.5 billion) of reductions, according to analysts at Tellurian in Houston. Saudi Aramco has cut "organic" capex for 2020 by 25 per cent to $US25 billion-$US30 billion, noted Bernstein Research.

Woodside's head of development, Meg O'Neill, said last week the company was taking "a real hard look" at the implications for the business of the meltdown in prices.

Santos was "reviewing all discretionary capex activities" and would freeze all external hiring for now, said chief executive Kevin Gallagher, while adding the oil and gas producer's business was "resilient" to low prices.

Junior player Carnarvon Petroleum said its Dorado oil project with Santos was proceeding as planned, with "nothing preventing" the start of design work this year.

"Our strong conviction is that the COVID-19 virus issue and low oil prices will be resolved in time," Carnarvon managing director Adrian Cook said in a letter to shareholders.

"We are of the view that the most appropriate course of action at the current time is to continue to focus on the delivery of our plans, and that includes supporting the operator in advancing the Dorado development."

The dramatic crash in prices since the collapse of the "OPEC-plus" alliance between the producer cartel and Russia has triggered a huge sell-off in oil and gas stocks and warnings from analysts of multiple delays in new projects and savage cuts to capex budgets.

Carnarvon shares dipped a relatively modest 3.3 per cent to 14.5¢ amid a sea of red in the sector.

Brent prices have more than halved since the start of the year, with Adelaide-based consultancy EnergyQuest saying that Australian LNG players were starting to experience a "double-whammy" of lower volumes and lower prices. It calculates that Australian LNG export revenue plunged $500 million to $4.03 billion from January to February.

The firm said the disruption to trade with China and Japan was starting to become evident in cargoes. It was most pronounced in shipments from Gladstone in Queensland, which supplies Chinese customers CNOOC and Sinopec.

Australian projects in total delivered 29 cargoes to China in February, down from 30 in January, but more than the 26 delivered in February last year, EnergyQuest said. Further up the supply chain, 12 Australian cargoes destined for China were delayed or diverted in February.

At the same time, the slump in the oil price will feed through to lower LNG contract prices in 2-3 months, EnergyQuest said. It calculates a potential drop of 46 per cent in contract LNG prices, based on a 12 per cent "slope" against crude oil, which meant prices that were at $US7.80 per million British thermal units at $US65 a barrel oil, dropped to $US4.20/MMBTU at $US35/bbl oil.

Meanwhile, spot LNG prices in Asia have started to claw back modest gains, Tellurian noted, reaching $US3.40/MMBTU last week, up US20¢.

Consultancy Wood Mackenzie said the revival of some economic activity in China as new cases of COVID-19 decline was providing a "glimmer of hope" for the oil and gas market. It also noted that the looming drop in contract LNG prices would reduce the large gap that had opened up between contract and spot prices, which could ease some of the tensions that have built up in the market.

Still, Wood Mackenzie analysts said on a podcast that new petroleum projects in Australia would be some of the worst impacted by the price crash because they were relatively high cost. They said the "second wave" of LNG development planned in Australia looked "very difficult" if oil prices stayed around where they were, given the projects were already relatively high cost with oil prices at $US60 a barrel.