COVID 19 Crushes Oil & Gas Markets

The impact is severe and alarming due to the travel restrictions imposed in more and more countries each day.  Goods are not movingand people are not travelling, resulting in a heavy blow to demand for transport fuels. With Covid-19 now infecting residents in almost every country in the world, the global oil market will continue to suffer losses for an unknown period, as the world comes to grasps with the global pandemic. The projection of future oil demand is tumbling, bringing global oil prices down with it.

Covid-19 –Economic Status and Downfall of Global Oil Markets

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Covid-19 has impacted the global energy industry in two key ways. The first impact on oil and gas demand is due to the travel restrictions; fewer flights and reduced use of public transport and private vehicles automatically means less fuel consumption. EU leaders have agreed last week to prohibit most non-citizens from entering the bloc for 30 days, with "very limited exceptions."  And while they are struggling to work out how to keep food, medical supplies, and other goods flowing across essentially closed borders, the trucks and commercial transport used to deliver them are at a standstill.

In addition, these sharp declines in demand, coupled with governmental advice to self-contain, has hampered production and forced companies to ask employees to work from home where possible. This has defeated oil consumption and shook real time oil demand.

Secondly, the disturbance to global stock markets, as a result of the Covid-19 pandemic on the world economy, establishes a very different projection of long-term global oil demand. Oil prices experienced their biggest fall, since the 2008 economic crisis, in mid-February, but demonstrated some steady figures as China started to report a reduced number of new cases. However, as the virus took a foothold in Europe, which eventually became the new epicentre of the pandemic, oil prices started to crash.

In the U.S., many oil and gas producers are already struggling as both crude oil benchmarks (West Texas intermediate and Brent) fell below $30 a barrel, whilst the emergency U.S. Federal Reserve and its global counterparts failed to tame markets.

Oil prices plummeted further as Saudi Arabia and Russia, two of the world’s biggest oil producers,failed to agree on production cuts and instead entered a price war. As a result, smaller U.S. oil companies, are now forced to make deep cuts, posing an increased possibility of bankruptcies, especially if oil remains below $30 per barrel or lower. Many companies require a price of $40-$60 to stay profitable.

In Asia, China's economic activity contracted sharply across the board in the first two months of the year, amid Beijing's aggressive measures to contain the coronavirus epidemic. According to the National Bureau of Statistics, industrial output in China declined 13.5% in the January-February period from a year earlier, compared with December's 6.9% increase. The result was much worse than the 3.0% drop expected by economists polled by The Wall Street Journal.

Meanwhile, shares of ExxonMobil dropped to $49.82 in the month of February, reaching a 15-year low, before rebounding more than 3 percent. On 9th March 2020, the price of the oil experienced its biggest plunge in thirty years. According to The International Energy Agency (IEA), global oil demand at 99.9 million barrels per day in 2020, slumped in demand by around 90,000 barrels a day from 2019 levels.  It is anticipated that demand for oil globally could plummet to 730,000 barrels a day as the Covid-19 virus continues to take hold.

Some analysts believe that due to the slow down in commercial, transport and industrial activity, and with more and more countries introducing total shutdowns, the world can expect the first full-year decline in more than a decade.

The adjacent figure shows the sharp decline in the price of oil as a result of the global pandemic.

The IEA anticipates two possible scenarios for how demand for oil globally could now evolve in 2020:  a pessimistic viewpoint states that if nations fail to contain the deadly virus in the coming weeks and months, global oil demand may fall drastically and the overall damage to oil demand could be as high as 790,000 bpd in 2020. An optimisticviewpoint states that if the deadly virus is successfully contained, demand will grow by 480,000 bpd.

It is, however, expected that the impact will continue throughout 2020 as countries respond to the global ‘lock down’ in both domestic and international travel.

Gas Follows

Asian spot LNG prices are also feeling the effects of the global pandemic and plummeting oil prices.  Even before the Covid-19 virus started to spread, gas prices were trading near their lowest in years. While spot prices have steadied over the past couple of weeks, they are still trading at their lowest for this time of year. They fell to a record low last month as the coronavirus outbreak dented industrial gas demand from China, the world’s second-largest LNG buyer.

While more businesses have reopened in China in recent weeks, analysts do not expect activity to return to normal levels until May or June. PetroChina, the country’s top gas importer, suspended some natural gas imports, including LNG shipments and piped gas, as a plunge in heating demand added to the impact on consumption from the Covid-19 outbreak.

Anticipated Impacts

• The current oil price will force a number ofsmaller energy companies out of business, along with their debts.
• A global economic recession is looming.
• Declining oil prices will jeopardise the renewable energy market and will bring down the growing attraction towards vehicles that utilise alternative (non-conventional) fuel sources.
• Low oil prices will bring uneconomic oil production forcing some companies to produce at a loss.
• $30 a barrel oil prices could put a full stop to the fracking boom and jeopardise some conventional drilling operations.  Severe unemployment could ensue.

Conclusion

The Covid-19 pandemic has resulted in long-term uncertainty, and the global energy industry is sceptical about making any new investments and adopting new business strategies. The impact of the global pandemic will last longer than the pandemic does.  As long asthe virus remains uncontrolled, so too will be the markets. Global energy suppliers who are reliant on oil and gas prices being above $40 a barrel, will face the biggest blow.

The immediate outlook for the energy industry depends on how swiftly nations come together and make every effort to contain the spread and effects of the Covid-19 pandemic. The oil price war along with long-term economic hesitation has sentfinancial markets spiralling, with as much uncertainty as the pandemic itself.

Originally published by The Abdullah Bin Hamad Al-Attiyah International Foundation

The statements, opinions and data contained in the content published in Global Gas Perspectives are solely those of the individual authors and contributors and not of the publisher and the editor(s) of Natural Gas World.