All right. Hello, everybody, and welcome to today's webinar. I'm Bob Anderson. I'm the Executive Director of the Committee of Chief Risk Officers. We're a nonprofit group of energy companies and industry stakeholders working cooperatively together on initiatives to advance risk management and compliance practices all across our industry.
If you'd like to know more about who we are and what we do, just go to our website at ccro.org. So it's my pleasure to moderate and speak in today's webinar entitled COVID-nineteen 2020 Oil Price Shock Impact and Outlook for Oil and Gas. Today is part 1 of our 3 part webinar series hosted by S and P's Global Market Intelligence, the Committee of Chief Risk Officers and the Alliance Risk Group. We want this to be an interactive session, so please feel free to submit your during any of the presentations or during the Q and A session that we have towards the end of the webinar. You can enter your questions into the question widget that you'll see in the lower right hand corner of the console.
Also, check out the other widgets at the bottom of your screen. We'd like to point out the resources widget, which is filled with valuable content and thought leadership and the survey widget. Please take time to fill out the short survey. We really value your insights. So before we begin, I've also been asked to mention that the activities of S and P's Global Market Intelligence are independent and separate from S and P's Global Ratings.
Okay. So I'd like to introduce today's speakers, and I'll start with myself. I've been And before that, I was Chief Risk Officer for El Paso Corporation, a And before that, I was Chief Risk Officer for El Paso Corporation, a consultant at McKinsey and Company and a lead in the business development and trading at BP Oil Company. So you can tell risk management has been a passion of mine for many years now. Now our first speaker is going to be Tom Waters.
Tom has been with S and P ratings for almost 23 years. And during his tenure, he led the metals and mining, paper and forestry and the building materials team. For the last 12 years, Tom has functioned as a sector lead covering the oil and gas U. S. Upstream space.
And thanks for being here today, Tom. Our second speaker is Neeraj Kumar. Neeraj is a Senior Product Manager at S&P Global. He's part of the go to market team for credit analytics models and Neeraj has been with the credit analytics team for the past 8 years at S&P Global. Prior to that, Neeraj was with JPMorgan Chase as a Product Manager.
And thanks to you, Neeraj, for being here also. Our 3rd speaker will be Harvey Tomcic. Harvey works as the quantitative modeling analyst within the S and P Global Market Intelligence Group, where he's developing quantitative models to assess credit risk of both public and private companies. And thanks for being here also, Harvey. Okay.
So for today's agenda, in the next 60 minutes, Tom will be discussing the pandemic and price shock impact on credit ratings in the first half of this year and in the outlook going forward. Then, Neeraj and Harvey will be discussing how you can leverage S and P's credit analytics models to gain some powerful insights into just how market conditions that Tom speaks about have potentially impacted the universe of your unrated counterparties. Finally, we'll hope to have anyways about 10 minutes to allow the speakers to respond to a few of the questions that we've received. Now let's get started. Tom, over to you.
Thanks, Bob, and hello, everyone. 1st and foremost, I hope you and yours are safe and healthy during these unprecedented times. I want to thank Global Market Intelligence and the Committee of Chief Risk Officers for asking me to present you all today. So my presentation is going to cover a very high level view of the oil markets, both globally and in the U. S.
And I'm going to talk a little bit about the nat gas world, what we're seeing, and then maybe discuss what the upstream universe looks like in terms of ratings and what some of the main drivers here are. So I'd be remiss if I didn't start off with a chart on a little oil price history. I'm going to go back to 2014 here as a reminder of where we came from, because I want to stress and highlight how the markets have been supported by OPEC and Russian intervention. It has been this OPEC plus, plus meaning Russia, that has had to support the oil markets against this onslaught called Shell, which has created a global glut. Now around Thanksgiving 2014, OPEC literally tried to deliver what I would call a death blow to this new kid in town and it failed to do so because of 2 things.
1, they clearly underestimated the ability of shale to cut costs and 2, they underestimated the U. S. Bankruptcy laws, and more on this later, but this allowed many companies to reemerge with healthier balance sheet. Now it wasn't until the summer of 2016 that OPEC Plus capitulated. And basically, they decided to support the oil markets through a series of cuts.
And of course, the last one being the 9,700,000 barrels recently announced after much acrimony and debate. Let's take a quick look at the impact of COVID on global demand, all right. Now just for clarity, we have the rating agencies, we don't actually forecast supply and demand, but we rely on either the 3 major import agencies. That's EIA, IEA or OPEC themselves. Believe it or not, all of them are kind of in the same ballpark with respect to their forecast.
But I want to make a note here that these forecasts do not, I repeat, do not assume a significant resurgence of global infections. If that were to occur, clearly these forecasts revised severely downward. Well, no doubt, looking at the numbers here, the way the charts are looking, this year is going to be brutal. The World Trade Organization, they're expecting global trade will decline by about a third, which is quite frankly the largest drop since WW2. Global oil demand will then suffer its largest slump in history.
The EIA is forecasting here global consumption is going to be down over 8,000,000 barrels this year and with the biggest impact coming from transportation fuels. The second quarter is going to be nonetheless just brutal. The biggest impact, we're going to see demand declining an astounding 17,000,000 barrels per day. However, economies are reopening and they're recovering. We are seeing consumption recover and will normalize somewhat next year, but remain lower than last year.
This is mainly due to aviation, and we believe that's going to be somewhat of a drag on overall demand. That's going to take a bit longer to recover than some of the other sectors. Let's take a look at supply real quick. In global supply, it's estimated decline about 6,100,000 barrels and largely due to the OPEC cuts that I mentioned previously. I believe OPEC production last month was probably the lowest level of crude production as it has since 1991.
And again, this forecast assumes that production has remained through this period, However, with some easing and the fundamentals begin to improve. Now globally, capital spending is down significantly. It's fallen about on average, we believe, 26% That approximates to about $80,000,000,000 Now, but what's interesting, I'm going to talk about more on this later, is we see a divergent of paths occurring between OPEC versus non OPEC, all right? Non OPEC supply, particularly in the U. S.
And Canada, is going to continue to face declines through next year. OPEC and Russia, on the other hand, will start to see gradual recoveries, and I'll say more on this in a minute. So what does it all mean for inventories? So with this backdrop, most of this year will most of the build this year is going to occur in the Q2, with inventories increasing over about 11,000,000 barrels. And clearly, refineries and demand collapsed much faster than supply cuts could be rectified.
For the full year, expect inventory level to increase by almost about 2,000,000 barrels per day. I would believe I think I believe this is the largest inventory build to occur globally in 40 years since it's actually been tracked. So it's quite significant. It would have reached near full capacity globally, but that's why OPEC did what it did and took production cuts to balance us. As I said earlier, with a combination of economic reopenings and supply cuts, it is believed that inventory draws actually started to occur last month, and we expect that to continue on through the end of next year.
And that should eliminate probably most of that surplus that we're looking at here. As alluded to, as non OPEC production declines begin to set in, the question becomes, where does this leave OPEC in Russia? Well, they're going to support short term price and we've seen that, right? But in our view, they will ultimately refocus on market share. And that means putting just enough oil on the market to avoid an increase in price, which would, of course, overstimulate U.
S. Shale. We don't believe they're going to want to see oil prices back in the $60 to $70 range, at least not in the near term. Instead, we think they're likely to prefer a more stable and sustainable $40 to $50 range. And that's a level that we believe does not reactivate U.
S. Shale. To that end, Saudi Arabia and Russian crude supply rising steadily through after July quota lows begin to pull back. We're going to see that happening and the stocks are going to draw and prices should move a bit higher. What this means for OPEC Plus is that this is the first time they should be able to garner market share in almost 5 years.
The strategy gets a little bit complicated. There's about 4,000,000 barrels actually offline right now. It's coming from Iran, Libya and Venezuela. And as the finds are way back, things get a little cloudy here, right? We believe the OpEx production cuts in the past, they were kind of insulated since much of the supply did stay out of the market.
So this potential supply has gone away on prices. And if we were to return the risk is you could see OPEC plus revert back to a price war to maintain market share. But we'll see. I put this chart in here because it really paints a picture of who the players are and what might be some of the geopolitical issues that could surface. So when you look at this chart on the left, it is clear that the Sunni based nations of OPEC have very deep pockets, right?
And you're probably aware there's a long history of conflict and bad blood between the Sunni and Shiite nations. Now of course, the recent bombings of the Saudi refinery by Iran or maybe I should say the Iranian backed or the Hochul militia that kind of highlights this issue, right? So given their deep pockets and much lower socioeconomic breakeven prices, Saudi Arabia, the Sunni, Brethren, they could use their biggest weapon, which is oil prices, right? They could drive Iran and other Shiite nations into financial difficulty. And that could possibly obviously reduce spending to some of these Shiite militia groups.
But these deep pockets demonstrate the possibility that if Saudi Arabia wanted to drive out shale and preserve market share, they have the wherewithal to do so for quite some time at a very low sustained oil price. All right. Let's just take a quick look at what this means for U. S. Production.
No surprise here from this chart, but if you're looking at the Permian being the basin of choice. It's got developed infrastructure, stacked place and it makes it the lowest cost shale basin in the U. S. One other thing to note here, I often get asked during the last downturn between 2015 2016, what was the peak to trough drop in production? It was about 1,200,000 barrels per day.
Of course, as they say, you can't keep the demand down. Producers lower their costs and production obviously continued to increase over time. Unfortunately, for many producers this time around, we believe they have very limited ability to improve efficiencies and like the last time. And more on this in a minute, which brings me to this slide. And I'm often asked this question about what are the breakevens for the basins and which basins here are the most profitable and make the most economic sense.
Well, look at this again, it's the Permian that leaves the pack and again, no surprise here. A few years ago, we were talking about breakevens that were in the mid-70s. But producers became efficient through adding more frac sand to the wells, more drilling per pad or rigs per pad and also longer laterals. But not all of the lower breakevens haven't gone through more efficient drilling techniques. The oilfield service guys have certainly been squeezed here.
We estimated about maybe half of these efficiencies have come on the backs of oilfield service price concessions. I want to be clear, this is based on what I call half cycle costs, which for this slide does not include a lot of the sunk costs like ACRIS acquisition, seismic or appraisal drilling. It's basically any costs before drilling and completion, all right. I like looking at this graph because you really get a picture, a better sense, sort of what the bogey is for producers to get on internal rate of return around 10% or greater. You need at least 10% to cover producer cost of capital, which we believe for the industry is about 8% or so.
And if you're not doing that, then you're basically destroying capital, right? And if they get to 10%, that doesn't necessarily mean that a lot of the guys are generating positive cash flow, right? So looking at this, and again, not everyone is covering the cost of capital $45 but clearly the Permian, Midland and parts of the Permian, Delaware do stand out. We like to think for the U. S.
Shale as a whole that $50 is really the demarcation line. Anything sustained under that, we believe it's very difficult for most companies to add reserves and offset the steep declines that you see in shale. And these declines can be up to 70% in the 1st year of their operations. Well, what it means for rig count, that was falling 74% since mid March and are operating at the fewest drilling rigs on record. I think that dates back to 1987.
It reached a low of about 279 rigs just a few weeks ago. The frac crews in the U. S. Are down an incredible almost 80% since mid March. And I did believe right now, we have about 75 crews are operating.
And this signals the major production declines we expect from May June that has happened here. U. S. Operators thus far, they've decreased their capital expenditures by about 36% from original guidance of last year, and that equates to about $41,000,000,000 roughly half of the global capital expenditures. Again, this does not bode well for any oilfield services.
Money is just not there for them. So as just alluded to, we saw a sharp decline in U. S. Crude oil production in May, June as some of these biggest of the wellhead got choked off at the REIT sort of inventory the reach inventories were getting pulled up. This will come back in July as inventories and oil prices have improved before we start to see decline in production trend in the second half in the U.
S. And next year. This is due to the effect of the lower rig counts. Decline curves, rig counts begin kicking in and this is going to offset the money that was spent late last year or over this year before the price collapse. EIA is forecasting that production next year will reach a low point of about 8,000,000 barrels per day in spring, but it's going to rebound for the rest of the year to average about 11 There's almost a 2,000,000 barrel swing from a record production they had last November, right?
For this year, production is going to climb about 600,000 barrels from last year and average about 11.6. Percent. Next year, EIA is expecting U. S. Crude to decline by additional 600,000 as well.
The key Cushing hub, the pace of stock bills was setting new records in April, with refineries seeing record levels of cuts to their throughputs. Demand just was not there. Remaining storage was down to roughly 10,000,000 barrels that was left. And in mid June July, total U. S.
Inventory levels actually hit an all time high of almost 550,000,000 barrels. Now Cushing storage has been down into around about 58% of capacity as we start to see economies reopening. Thank God for that because I don't know where the way to put it. If you recall, we had the May WTI contract price that actually hit a negative for the first time in history. Basically, there was no place to put it.
And then a lot of the longs got squeezed on this. But we don't expect that to occur again with the inventory levels that have been improving here. Let's shift gears a little bit and talk about natural gas. What we've seen here is a shift away that occurred from the Haynesville and the Barnett to the, I'd like to call, the more prolific plays of the Marcellus and Utica, is more located in Northeast. It's really coming down a case of the haves and the have nots.
So the Northeast Appalachians has been a big driver for U. S. Gas production. But it's the Permian growth that really is fascinating because not a lot of people are actually drilling for gas. And I'm going to talk about that in a second.
Interesting to note here, the Barnett, which was the place to be 10, 12 years ago is slowly dying. And really nobody is even drilling there right now because it's just too expensive to do so. So the same thing I presented before, oil and I'm doing here with gas. This is the wellhead, so it does not include transportation. These are some of the gassy plays that are broken up by breakeven price.
Again, it's the Marcellus and Utica that have the lowest breakevens. Haynesville is in here as well. It boils down to costs and efficiencies and some quite frankly, some really good rock. You can see how low the breakeven prices are for these regions. Now what makes the rock so good is the Marcellus and you're going to especially have stacked plays at much better pressure, which results in good initial production rates.
I didn't include the Fayetteville or Green River and Piannis, but their break ins, they would be on the right side of this graph on the higher end here. They're not making money at these gas prices. And the internal rate of return sensitivity to our gas, this really only validates the previous life. That's the gas in place, the Marcellus, Utica, that stand up for the best returns for the most part. And these IRRs really begin to pop with any increase that we get in pricing.
About gas production rig count, yes, gas production went as far as May, but I added the latest rig count, so you see a little bit of a disconnect here. But the point I was trying to make here was while gas director rig counts have fallen, gas production continued to increase and hit all time highs last year. Now you could say this would suggest efficiencies and productivity is in play here. That's true, but that's not the only reason. That's another story that's going on here.
Which brings me to this slide. Now this slide for me is really why it's hard to see natural gas price above $3 anytime soon. It's because almost half of the gas production in the U. S. Is coming from wells that are not gas focused.
It's almost byproduct gas. This gas is just and it doesn't behave by any laws of supply and demand fundamentals. I mean, you can flare it, but there are restrictions on that in some states, right? So we see a lot of gas pipeline capacity has come on last year, which will reduce the amount of gas flared. And of course, that put pressure on the Henry Hub price as we saw when Gulf Coast Express came on and brought a lot of that trapped basin gas directly to the hub.
So as I said, dry gas production actually set a record last year. However, we expect gas production will average about 89 Bs this year. Monthly production is going to fall from an estimated peak of 93 Bs to 85 late this year. And these declines are mostly coming from the Appalachian region and the Permian. Now with the oil rig count down somewhat, that's what's affecting the Permian production because this byproduct gas just isn't coming out, no one's doing it for oil.
Next year, gas production averaged about 85Bs and begins to rise in the second half in response to higher prices and of course, continued market re openings. The market is going to rely heavily on producers in Appalachia and Haynesville to balance this market. So in terms of consumption, gas demand declined about 3%, almost 3 Bs this year. Half of this decline is coming from lower industrial consumption as manufacturing has taken a bit beating due to the coronavirus. Also, global LNG has had a dramatic impact on U.
S. Natural gas demand. Globally, LNG prices reached bottom. And quite frankly, there is no place to actually put it in Europe. So we're seeing cargoes that have been either force majeure or deferred, which is companies that gas is building up and no one's taking that.
So what's it mean for inventory levels? Well, storage at the end of June was about 3 just a little over 3 Ts, and that's about 30% more than a year ago and actually 18% more than the 5 year average. And this is due to the warmer weather we've been having the and obviously the continued production growth. Now this clearly doesn't put the nat gas market in a good position here to handle ramifications of COVID. Now the forecast, inventories are expected to rise about another T during the April to October injection season and it's going to be over 4 Ts by the end of October, which should be a record level, okay?
Again, this is also because of demand falling off so quickly before supply could even respond here. Let's get some of the fun stuff. And when I talk about ratings and financial condition, as a takeaway here, and you can sum it up by saying, things are not good in the oil and gas upstream patch, not good at all. Before I get into the particulars, just a quick overview. This includes the E and P Companies, the Offshore Contract Driller and Orefoservices.
Now my team doesn't rate the midstream or refineries, although we work very closely with them. The bulk of the companies here, as you can see that we rate our E and P and they're about 66% of the overall portfolio. Boil it down by rating categories. And what's interesting to note here is that of the total in the upstream space, 75% of them are high yield. And when you bifurcate that a bit further, 60% are in the single B and below category.
And that basically speaks to a high degree of ratings volatility and lack of staying power through cycles. But let's break it down just a little bit more, and we find that 35% of the 8 or so issue that we rate are in the CCC plus and below category. Now when you get into the CCC plus category and below, it means there's a very high probability of default or bankruptcy in the coming year. Now a staggering 86% of the company's rate have negative outlooks. This means that we could lower them further within the coming year.
The U. S. Shale business, and look at this slide, is an industry that used to be rewarded by equity markets by growing production. And they did this through outspending of cash flow and relying on capital markets to fund these deficits. Well, that changed and that changed a few years ago when some equity investors literally got in a room and demanded that the oil and gas industry stop destroying capital through this ramp in growth in production.
They created the cycles with their go go production numbers. And what the investors wanted was nominal growth. They wanted the producers to live within cash flow, and they also wanted to increase returns either through dividends or share buybacks. And you can see here how the equity markets have completely dried up while the debt issuance has declined as well. Now what this did, it essentially has forced producers to undergo major strategic transformations.
Now for E and Ps, they've revamped their portfolios by selling off non core, higher cost assets, right? They want to focus on higher return core properties and improved returns, that makes sense. They also had to embrace fiscal discipline, something they really weren't doing before the last cycle. And they did this by cutting capital expenditures and living cash flow. And lastly, they had to prioritize shareholder returns and they did this through instituting dividends and stock repurchase programs.
Why did this all occur? So why did this all occur? And yes, so why investors have left the room? Over the last 5 years, this industry has been one of the worst performing sectors in the S and P 500. I mean, the shale revolution, it unlocks the vast low cost oil and gas reserves and it unleashed soaring production And it transformed, of course, the U.
S. From a major oil and nat gas importer to an exporter. But this turnaround, it triggered a substantial decline in oil prices and a bear market in natural gas. And what it did was just ended up destroying a lot of invested capital, more on this in a second. The numbers are simply staggering.
Approximately 231 E and P issuers have filed for bankruptcy in North America since the beginning of 2015, and no wonder why investors have left the space. But what has been more upsetting to them is that many of the issuers who filed for bankruptcy actually reemerged. I guess we sometimes joke around and say whether they become Chapter 22s. Same story here for Oilfield Services. Again, the numbers are simply staggering.
214 companies have filed since the beginning of 2015. Now for Oilfield Services, we believe there's a fundamental shift that has occurred over the last couple of years. 1 is because those cost reductions I mentioned earlier, they're permit, and that means just less capital sorry, less So both of these just and it reduces the need for goods and services from Oracle Service Companies, right? In our opinion right now, OREFL service companies have absolutely no ability to increase prices. So let's take the amount of debt that has been filed in the bankruptcy.
In the E and P space, the amount of debt that has been filed since 2015 was roughly $152,000,000,000 And I'm going to apologize here, I noticed that the 2020 debt number wasn't updated. So it's about $152,000,000,000 that has been filed in for the beginning of 2015. Now let's throw in $90,000,000,000 of debt filed for bankruptcy in the oil and fuel service base since 2015, and we have seen a total of $242,000,000,000 of debt capital destroyed in the upstream space. Sadly, with prices where they are now, there is more to come and we're seeing a wave of bankruptcies and defaults occurring this year in 2020. The debt maturity profile, as it ratchets up is a bit concerning as well, especially when you consider, again, there's no really access for the high yield space in the unsecured market that pretty much have left.
Also, you consider investor sentiment, right? There's a limited market here for equity given the weak valuations and of course, poor returns. And lastly, there's a limited ability to sell assets. So how are companies going to address this? We're not so concerned maybe in investment grade space, especially since the Fed jumped in and supported the bond markets, we saw rates come back in significantly.
It's more so for the high yield space. Like I said, they do not have unsecured capital market access. They're looking at anything they can do as far as securitized deals, etcetera. And here's the reason why we are concerned with the high yield space. Rates are just not conducive to attracting capital right now.
And in comparison to the rest of corporates, you can see how investors have made a clear delineation for the oil and gas space. The high yield space is facing rates that are just well above sector cost of capital. Quite frankly, it doesn't make any sense. It's funny, but it's the capital markets that might achieve actually what OPEC failed to do back in 2014, and this is to drive out a chunk of the U. S.
Shale production. We've been busy. We've been very busy. We recently revised our price decks in March, and most of the issuer ratings in the high grade space were just lower simply due to leverage being somewhat rich for the prior rating or they were not unhedged and maybe had weak credit metrics going into this. The issues where we only revised the outlook or had affirmed, they tended to have healthier balance sheets, lower cost ops or had pretty good hedge positions in place.
Now for the high yield ratings, many of our actions were not actually due to leverage or weak credit metrics, but more due to capital market access concerns for any of that debt that I just showed you that was maturing as well as concerns of revolving credit facility borrowing basis. They declined anywhere from 20% to 25% in the spring that just passed. Banks that we talked to are definitely taking a tougher tone on them versus the last cycle. And then a couple of them have said to me that they're actually more willing to hold assets maybe this time around as opposed to working with issues and working through them. This actually concludes my presentation.
I'm going to turn it over to Neop.
Thank you, Tom, for the insightful analysis. So, so far we have focused on oil and gas market with S and P ratings lens. Now let's talk about oil and gas sector and other industries using credit risk of unrated firms. We know there are less than 10,000 rated companies like the tip of this iceberg that you see on the screen, but there are millions and millions of public and private unrated funds. In this section, I'll focus on the credit risk of unrated firms and tell you the impact on the industries because of coronavirus.
To assess the creditworthiness of unrated firms, we use S and P Global's Credit Analytics package, which is a suite of quant based models. We have multiple models like credit model and PD fundamentals covering through the cycle view of credit risk and PD market signals covering the point in time or short term view of credit risk. We also have risk gauge model that combines through the cycle and point in time via credit risk assessment from various credit analytics models into a single score to provide an aggregated and unified view of counterparty's creditworthiness. In addition to providing credit risk assessments in different scales like 1 to 100, AAA to C or PD percentage, the model also provide absolute contributions of credit metrics used to generate the score. Let's look at some data generated by these models.
Before I jump into the analysis, few points about how we generated this data. Since these are unprecedented times with high volatility in the market, we focus on results generated by PDIP model market signals, which provides point in time or short term view of credit risk. It is an enhanced merchant based model that uses country and industry risk factors in addition to market cap and asset volatility of the company and produces a 1 year probability of default for all public corporates and financial institutions globally. Using this model, we scored all publicly listed companies in the world and generated industry based median values or benchmarks. We looked at these benchmarks from January 1, 2020 to July 15, 2020 and looked at the most and the least volatile industries.
Now the stage is set for how we generated data, let's look at the results starting with the top 5 industries impacted by COVID-nineteen. Airlines with mass groundings of air traffic, border closures and shelter in place policies across the globe, leisure facilities with widespread closures of gaming facilities, postponement of most sporting events like Summer Olympics, etcetera. Restaurants have been closed all across the globe. Oil and gas drilling because of reduction in demand from industries like airlines and the oil price war type growth between Saudi Arabia and Russia and hotels, resorts and cruise lines being closed as well. But if we focus on the airlines industries, on January 1, the probability of default, median probability of default was 2.75%, which maps to a credit score of B plus The median one year PD has risen steadily since the beginning of the year, but we see the major spikes in the end of February.
That's when we started seeing the impact coronavirus in the U. S. Based on the fear of spreading coronavirus, businesses and leisure travels were suspended, conferences were canceled, borders were closed and in the end of March, the government announced $58,000,000,000 bailout for the airline industry, which stopped the steady rise in the PDs. The PD stayed close to 20% of CCC credit score range in April May before dropping in June July to B- range. We can notice the similar movement of median PDs in the other industries mentioned here.
Similar to the top 5 industries, we also looked at the industries that had the least volatility in median 1 year probability of default and notice these 5 industries in insurance and real estate investment sectors. Please note that these were the least volatile in this period, but they were not the best performing industries. We still notice steady increase in PDs for all these industries, especially REITs going from investment to non investment grade. If we focus just on energy sector, we see the similar story where all these 7 industries have seen a steady rise in the median probability of default. Oil and gas drilling, however, is the most impacted industry.
Again, we noticed the rise in median PDs since the beginning of the year, but the major spike is apparent from end of February to end of March. The two main reasons for that are 1, reduction in demand of oil at the end of February and 2, the price war that broke between Saudi Arabia and Russia starting around March 8. The median PDs in this timeframe jumped from close to 5% to close to 25%. The price war ended on April 13, but we did not see the PDs go down till mid May. Since then, we have noticed a steady decline in PDs, but the PDs are still not back to pre COVID level.
Price of crude oil tells a similar story. If we overlay the price of crude oil on this chart, we can see that the price of crude oil dropped steadily in this period. On January 1, it was around $61 per barrel. End of April, it was around $20 to $21 per barrel. And then July 15, it was around $40 $41 The major drop in the price that came is in the same timeframe of end of February to end of March.
And now I'm going to hand out to Harveen.
Thank you, Niraj. Welcome, everybody. I would like also to thank the Committee of Secretariat Participants for inviting to this presentation. And As the title says, my angle here is to present the results of our study in assessing the change of the credit risk due to COVID-nineteen and the oil price worse via our statistical models. And as already mentioned a few times, what we are going through are unprecedented times.
And the oil price being a major factor for oil and gas companies is an important driver for the credit worthiness. Therefore, within the market intelligence, we performed a study to quantify the impact on the credit risk and at the same time to assist the users of our statistical models in finding a fast and efficient solution in reevaluating the creditworthiness of their the creditworthiness of their counterparties. So the first question, how to see the change in credit risk, was to was it looking at previous experiences, such as the oil price drop between the 2014 2016, which offered to us a rough proxy, but the materiality of the current situation was much bigger and profound that brought us to create an in-depth study and ultimately a credit risk reassessment solution for our clients. And how to apply these results? Well, we first used a fundamentally based approach based on financial statements to reassess the credit risk for energy companies under different operational scenarios.
2nd, we identified an early warning system or KRI for flagging credit risk deteriorations or identifying important market sentiments. And last, we show a solution that is able to merge all these results to optimally calculate the appropriate maximum exposure towards other counterparties in dollar amount. And so our first research looked at the credit risk exchange to apply to counterparties under different oil price levels or scenarios. So we conducted a quantitative analysis to test for statistical significant relationships between the oil price change and the change of the PD in the energy industry. And the study was performed on quarter over quarter changes of PDs between Q1 of 2011 and Q4 of 2019.
The quarter over quarter change of the PD has been statistically analyzed with respect to the quarter over quarter change in the oil price. And 2 different test cases were created to maximize the statistical significance, one that included the default observations, so for example, to be applied on non investment grade and another one that excluded default observations, so for the users to apply it on a pool of companies within the investment grade. And the results, the study shows statistical significance that we summed up into a table for Brent and WTI to offer immediate and simple solution to our clients for using our statistical models. So for example, under a case scenario of $15 per barrel, we identified the appropriate PD change to be applied to counterparties depending if they were within the investment grade rather than non investment grade. And as you see, we published those results in a way that could be easily understood and easily applied within our statistical models.
All right. The next step was to leverage our market driven model that uses market information in identifying early warning signals or to create KRIs. The study shows how this approach can be very powerful in creating KRIs for identifying anticipating market uncertainties prior to major events, such as the famous and negative oil price drop or OPEC disagreements or even rating actions. So let's go with the next slide. In fact, by leveraging our market driven model, we showed how it is possible to create a tool that recognizes market uncertainties and potentially anticipates credit risk deteriorations.
In particular, this plot here shows how the model signaled clear flags of potential credit risk deteriorations prior to major OPEC disagreements and oil price wars that happened through the first half of twenty twenty. So as you are looking at the plot, you see in black the trend of the PD market signal. In gray bars is actually the early warning signal that was created, this tool that shows you how it's anticipating the red bars that are signaling or that it's the accumulated number of rating actions. And in the red circles are the major oil price worse events. So for example, to name your fuel, the China slowdown, the OPEC plus disagreement, the Saudi Arabia oil price cuts, the OPEC plus agreement and all the way to the oil price drop.
Okay. Let's go now with the next slide. Last, to conclude, we developed a framework that is capable of putting together all these results found in our research and that enables the user to calculate in dollar amount the appropriate maximum exposure towards its counterparties. So as you can see from the plot, in the context of the supply chain management or treasury, this new framework combines or intersects different risk dimensions. It embeds the counterparties' risk, credit risk, industry payment behavior, but also the user's risk appetite.
To conclude, this framework enables the user to manage different risks, but most importantly, to manage the appropriate exposure amount towards counterparties. And we believe that such tool is becoming even more important after the crisis that we saw in the oil price war in COVID-nineteen. Thank you. This is all from my side. Back to you, Bob.
All right. All right, excellent presentations. And it's really nice that these are all being recorded and will be available within a week for replay online. So thanks very much you guys, everybody. Everybody's presentation has been really well.
And these presentations have really brought to home for me a thought, that is that with all the focus these days on credit markets, the oil shock and the effects of the pandemic, it's very timely that the CCRO is updating its white paper now on credit risk best practices. In addition to the energy credit practitioners involved from various companies around the industry, we partnered with a number of key stakeholders like the International Energy Credit Association, Mueller Hermes, Laquigo, Cubelogic and Alliance Risk Group. In fact, Morgan Davies of the Alliance Risk Group will be moderating tomorrow's discussion on the energy sector capital and distressed debt markets. So, for the audience, if you're interested in being part of the CCROs Industry Credit Practices Initiative, please leave your name and mention your interest with the question widget or just contact the CCRO at infoccro.org. So let's go ahead and get started though with the Q and A now.
If I look at the timer, we have a good 10 minutes still. So I think we can dive into some particularly interesting questions that I've seen. First, starting for Tom. So Tom, if you want to unmute yourself, I'm going to ask you this first of 2 questions that have popped up. Are you there, Tom?
Yes. Thanks, Bob.
All right. So this one asks, please speak to the mid- to long term effects of the pandemic on energy and commodity prices. And could this create an opportunity for renewable growth at the expense of natural gas or crude? So that's renewables growth at the expense of natural gas or crude, what do you think?
That's a good question, very interesting question because when it comes to the outlook for renewables, there are so many variables to consider and factors to consider. But let me try to answer that in 2 parts. And in the near to medium term, I guess, this pandemic is likely going to be, I would consider, probably the biggest shock that renewable energy story has ever seen, right? The time it couldn't have been worse because it come to the time when the global energy transition, it was really beginning to build some steam here. Even the IEA just recently came out and said they warned that the coronavirus is going to weaken global investment in clean energy.
So because of this low oil and gas price environment, the economics of renewables probably just can't compete right now. And they might most likely tend to seed some ground to the cheaper these cheaper fossil fuel sprint. So and there's an ongoing yin and yang between these guys. So adoption and I guess innovation of renewables, that typically accelerates when fossil fuel costs are high and decelerates when costs are low. And that's just simple economics.
But the pandemic is going to slow global economic growth, right, we know that, and also tax revenues. And that's going to keep energy demand and hydrocarbon prices low and that's probably going to limit any fiscal political will, if you will, for subsidies for renewables at this point. We know as global economies are they're going to go through some belt tightening here and as they manage the economic fallout. Now the governments could look to taxpayers maybe to fund some of this support and subsidies, but that could be right now at this point politically disastrous. So over the longer term, I'm thinking maybe 5, 10 years from now, it's conceivable that these lower hydrocarbon prices, though, and of course, the overall company spending budgets, that could lead to a serious contraction of oil supply, all right?
And there's no doubt, as I've talked about, oil companies have been cutting their E and P budgets. And with ongoing investor pressures for these producers to focus on returns, they'll continue to do so. So it is conceivable to some degree that the resulting shortage of fossil fuels could lead to higher oil and gas prices and that in turn could lead to something greater appetite, if you will, for alternative energies or renewables. I would like to make the argument that regarding the producers sometimes they've got weary of the volatility of these of fuel prices, oil and gas. And they could look to ramp up renewable investment, just to garner more stable and predictable returns.
The question becomes, when do oil and gas companies become energy companies? And that's going to be a great debate and we'll see how that transforms over the coming years.
Fascinating area of speculation. I love it. Great answer. And there's one more for you, Tom, before you go. And this is kind of important.
You had mentioned to me about something called potential fallen angels. For the audience, can you tell them what that is and why are companies who have the potential for that, are so closely watched?
Yes. So what I mean by fallen angels are companies that are on the cusp of falling out of investment range and that changes their whole investor base and dynamics. When we lowered our price decks back in March when oil went off a cliff, when we reviewed the whole portfolio, what we saw was 8 companies were right on that cusp, but just happened to play out that way. Now what I mean by that is a rating of BBB- with negative outlooks. As I said earlier in the presentation, that negative outlook means it could be downgraded within a year or 2 if things don't improve.
So companies, investment grade, they try to maintain investment grade companies because they want to do that because a, it's cheaper cost of capital. It's a different investor base. It's also a rite of passage, right? I'm an investment grade company, I'd like to say that. But it affects their funding.
So when they get knocked out of investment grade to high yield, their funding rates go up, sometimes their bank line of credit goes from unsecured to a secured facility. So it really changed the playing field, the level of economics as well. And the investor base, they don't like being caught by surprise either one because they have to sometimes they're mentioned maybe that's going to invest in investment grade credits, they have to liquidate or sell off the bonds, which could affect their pricing, of course, investor returns. So it's really something that's watched very closely by capital markets, especially on the debt side.
Right. Makes a lot of sense. Okay. For Niraj, I've got one here. There's some interest in your charts that say, do the models you utilize for your charts, Niraj, do they integrate into your Capital IQ product?
If so, could you explain how?
Sure. Yes, the models are available on S&P Global's Capital IQ platform. On the desktop. The data is available through Excel, the plug in that we have created for S&P Capital IQ. And the models are also available to be integrated as services in 3rd party platforms like Cubelogic you mentioned or HighRadius, the different platforms that are available in the market.
These models can also be integrated with those So they're available through all the channels that are for distribution. Excellent.
Okay. I've got one here for Harvey. Harvey, on the last slide, you introduced and kind of started discussing a new, we'll call it a 3rd model. Is that model available yet? Is it complete?
Or how do you see it being delivered and when?
Yes. Thank you, Bob. In fact, I'm excited to say that we just launched this new set of models, among which is also the maximum limit framework, and it's already available for our CA offering. This new framework that I said before is really powerful because it combines several different our strong and good discriminatory power models in assessing the credit risk, but additionally looks at many various risk dimensions, adding also the businesses and the risk appetite from the user itself. So it's something already available within our risk gauge reports in our CA credit analytics offering.
Excellent. So all right. So if I look at the clock, it looks like we are trying to stick firm to our time. So I guess effectively it looks like we're out of time right now. If you submitted a question that we didn't get to and I know there are a number of them out there, We'll get back on that as soon as we can.
But in any case, let's say thank you to S and Ps Global and the Alliance Risk Group for making this webinar series possible. And a big thank you to our audience for taking time out of your day to expand your knowledge and advance risk management practices across our industry. And don't forget to join us again tomorrow at 11 o'clock Eastern. We'll be having our second webinar of the series entitled Energy Sector Capital to Stress Debt Markets and Restructuring Outlook. Tomorrow at 11 Eastern again, the expert speakers will discuss the outlook and actions that organizations should be taking today to right size their capital adequacy.
We'll also review considerations about a key risk that can be embedded in contract arrangements. So it should be an interesting one. So thank you everybody and goodbye.