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Energy Sector Update for 05/27/2020: ^DJI, ^IXIC, ^SPX, ^FTSE

The COVID-19 pandemic has set in motion the steepest plunge ever in global energy investment as spending will likely plummet in every major sector this year, the International Energy Agency warned on Wednesday.

Global energy investment is now forecast to drop by a fifth in 2020, or about $400 billion, from a year ago as the coronavirus crisis brought large swathes of the world economy to a grinding halt in a “matter of months,” according to a report.

At the start of 2020 when the health crisis was not on the horizon, the investment was on track for growth of about 2%, which would have been the largest annual increase in spending in six years.

“For oil markets, if investment stays at 2020 levels then this would reduce the previously-expected level of supply in 2025 by almost nine million barrels a day, creating a clear risk of tighter markets if demand starts to move back towards its pre-crisis trajectory,” the International Energy Agency said in its report.

Investment in shale is anticipated to fall by 50% in 2020 as investor confidence in the shale industry, which was already under pressure, and access to capital has now “dried up.”

The agency said revenue that governments and the industry get from energy was set to fall by more than $1 trillion in 2020 because of falling demand, lower prices and a rise in cases of non-payment of bills. Oil accounts for most of this decline as, for the first time, global consumer spending on oil is set to fall below the amount spent on electricity.

Meanwhile, Goldman Sachs said in a report early on Wednesday that continued volatility in oil prices driven by COVID-19 related demand reductions and resulting producer shut-ins and production cuts have led to a heightened focus on

producer hedging/price exposure. Covered producer hedging now stands at 66% of 2020 estimated oil production, versus 48% pre-downturn.

“60% of the difference is explained by increased hedges and 40% is due to lower production,” Goldman analysts led by Brian Singer said in the report.

Goldman’s base case for West Texas Intermediate futures price is $31.77 in 2020. Early on Wednesday, WTI traded down by 1.5% to $33.85. In April, WTI traded below $10 and at the end of last year it was perched above $60.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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