Insights - Energy Dais
Corona Pandemic

Opinion: Impact of Corona Pandemic on the Oil and Gas Industry

The current black swan event of the corona pandemic is set to change the fortunes for many sectors and will likely change the world order irreversibly. Many business sectors will be forced to restructure their business models & supply chains, to ensure business continuity and sustain their bottom-line. Previous black swans have done the same and this time, the impact may be even more exacerbated. The oil and gas industry has been severely impacted by such black swan events and the financial crisis of 2008 is a strong case in point.

The oil prices post the ‘financial-fiasco’, plummeted to $33 per barrel by February 2009, where earlier it had recorded a high of $147 per barrel in July 2008.

In addition to that, the gas prices also fell from $14 to $4 in the same time period.  Since the outbreak of the coronavirus pandemic, the consolidation seen in the oil prices lately has halted and the prices have completely crashed. The immediate restriction on the movement of people and goods across boundaries has led to this severe cut in the oil prices. The lockdown in manufacturing and labor-intensive Asian countries, increased grip of the pandemic over the US and Europe, has brought down the outlook of the growth of the global economy and hence the future of oil demand and prices. 

The global oil market demand has already lost over 20 million barrels per day because of the corona outbreak. The effect can also be seen in the pummelling prices of crude oil of various indices, with WTI Crude currently priced at c.$22 per barrel, Brent Crude at c.$31 per barrel and OPEC Basket at c.$21 per barrel, at the time of writing this piece. Some major oil stocks have lost almost half of their valuations since January, and many companies in the sector are on the verge of going under. A case in point is US shale driller, Whiting Petroleum which came out as a major casualty, as it filed for bankruptcy protection in early April.

The virus is spreading at the rate of knots across 209 countries and with the backdrop of no proven vaccination in sight, the rapid southward decline in the oil consumption and prices is seen as unavoidable. Moreover, the speed at which it is spreading across the US, the increasing number of patients in India despite a national lockdown and worsening situation in Europe, is adding to the already grim outlook for the sector. For instance, oil demand in India has gone down 70 percent of the usual, equivalent of demand loss of almost 3.1 million barrels per day, as the country undergoes a national lockdown of its 1.3 billion people. With the current demand across various products running at somewhere between 30-40 percent of the usual, the state’s refiners are optimistic about the post-lockdown phase, though there is a common sentiment that reaching up to the pre COVID levels might take a considerable amount of time.

Meanwhile, the signs of recovery in China is a silver lining in this otherwise a very dark cloud. China has been a major contributor to global oil demand growth lately and has been accounting for over two-thirds of the global oil demand growth. Being the most critical manufacturing stage of the world, if the operations begin in China, even at a slow pace, then it might provide much-needed support to the overall sector, and in turn the global economy as well. As production levels across sectors tend to improve in China, the fuel demand is likely to increase, giving relief to some extent to investors and companies. 

Another constructive event that might provide a floor to the falling oil prices is the end to month-long production tussle going on between Saudi Arabia and Russia, when both the nations gracefully agreed to cut down oil production, in the wake of the falling demand caused by the rapidly accelerating Coronavirus pandemic. Following the days of discussions among the leading oil-producing nations, the OPEC countries led by Saudi Arabia and its oil-producing allies that include Russia, agreed to cut oil productions by 9.7 million barrels per day. This quantity combined with the reductions from all other oil-producing nations, will lead to a total production cut of roughly 20 million barrels per day from the global supply. Hopefully, this cut will allow the oil price to rise to comfortable levels for the oil-producing nations and bring much-needed stability in the global energy markets.

(Suggested Read: Corona Outbreak and the Big Five Crude Markets)

Market, however, seem uninspired by the move, so far. The noise on the street is that this might be inadequate and a bit late in the day, to match the slump in demand as a result of the quarantines and lockdowns which have been introduced around the world to impede the proliferation of the coronavirus. If the unlikely, worst case scenario of losing 30-35mn bpd of demand lost, plays out, the oil producers might have to find the space to store the surplus capacity, which shall run to the brink, the entire onshore and floating storage available globally. These extremely bearish scenarios reflect upon possible calamitous repercussions of  COVID-19 on the global energy markets. The current actions of the supply cut, led by the Kingdom of Saudi Arabia and Russia are nevertheless a very promising move to address the current situation and stabilize the global markets.

As the governments and countries around the globe, collaborate to contain the spread of the virus and are taking the necessary coordinated measures, there is still an uncertainty dangling over the fate and the pace of global economic recovery. Since there are no vaccine available in the market, and the estimates for a vaccine availability on the street, range anywhere from 8 to 12 months, all the OPEC+ nations and the rest of the world, need to work together in sync to restore and maintain stability in the global energy markets. 

Lastly, some attention should also be given to the impact of these whirlwind developments in the COVID era, on the renewable energy sector. With all the governments across the world caught in a tailspin to get their economics back on track, the renewable sector which was gaining traction and support from these governments across the world, will likely falter and this might play back into the hands of the oil & gas majors. 

(This piece was contributed by Amit Marwah and Energy Dais reserves all rights of publication.)

mm

Amit Marwah

Mr. Amit Marwah is the Chief Investment Officer of Dayim Holdings, a major investment firm in the Kingdom of Saudi Arabia. Dayim Holdings was established in 2006 as a platform to act as an incubator for top international companies to enter Saudi Arabia, UAE, and other surrounding GCC markets. The group has Joint ventures with some of the biggest global organizations from the US, France, Sweden, Spain, India, etc. Mr. Marwah has played an instrumental role in executing several multimillion-dollar transactions over the last decade, across the Middle East, in partnerships with major international brands. He has also been involved in building grade A oil and gas joint ventures in Saudi Arabia.

Add comment

mm

Amit Marwah

Mr. Amit Marwah is the Chief Investment Officer of Dayim Holdings, a major investment firm in the Kingdom of Saudi Arabia. Dayim Holdings was established in 2006 as a platform to act as an incubator for top international companies to enter Saudi Arabia, UAE, and other surrounding GCC markets. The group has Joint ventures with some of the biggest global organizations from the US, France, Sweden, Spain, India, etc. Mr. Marwah has played an instrumental role in executing several multimillion-dollar transactions over the last decade, across the Middle East, in partnerships with major international brands. He has also been involved in building grade A oil and gas joint ventures in Saudi Arabia.





Get the latest insights of the oil and gas industry straight to your inbox.
Subscribe to our monthly newsletter today!

Latest News