Effect of Coronavirus on Oil and Gas Business

When China reported its first case of pneumonia on 31st December 2019, the world was busy welcoming the new decade. We did not have the slightest clue that it will result in a pandemic and engulf the economies around the world. Right now, the nations are on lockdown and the markets are on their knees. And in times like these, the oil and gas business has been the hardest hit. Effect of coronavirus on the industry is unforeseeable right now but a few predictions have surfaced amidst all the chaos. This will bring into perspective as to what can be expected after this storm ends.

Effect of Coronavirus: Current Scenario

“The coronavirus crisis is affecting a wide range of energy markets – including coal, gas and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels” – Executive Director, IEA

Oil and gas companies have put various measures in place to ensure the safety of all the employees. People are working from home, production has been compromised affecting the upstream sector, oil prices have gone for a toss and downstream operations are moving towards flexibility. In an attempt to outline the crisis, a few major updates have been briefed below.

Oil Prices Crashing

Oil prices collapsed in the recent week and came crashing down by 24%. This was one of the worst sessions in the last three years. At that point, commodity hit an 18 year low. Right now, the market has surplus supply whilst the demand is going down continuously. With the world’s largest consumer, China becoming the epicenter of COVID-19 outbreak the market started to lose its balance. Effect of coronavirus on the oil prices is very much evident but what’s uncertain is how will the industry normalise this situation.

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

Status of the North Sea

Soon after the epidemic reached the UK, the nation declared an economic emergency. But since the North Sea operations have been at the core of the offshore oil and gas industry, the conditions are becoming worrisome. Analysts predict that this could cause the oil-drilling activity to fall to levels last seen during the 2016 oil market crash.
The work on the offshore rigs has been decelerated after Oil and Gas UK (OGUK) banned the workers travelling to offshore oil platforms if they have returned from virus affected countries in the past 14 days. The measures put in place to safeguard staff might affect the energy needs of the UK. The effect of coronavirus is such that it has wiped out billions from the value of UK companies.

Demand decline

While we are hoping that China restores production soon, countries like the USA and the UK have shown a substantial drop in demand. The International Energy Agency has predicted the largest fall of the decade in terms of demand, 90,000 barrels per day. And this situation may worsen considering the spread of the virus. In the days to come, the effect of coronavirus will not be an easy one to recover from considered the wreck it has been till date for the overall economics of the industry.

Russia and OPEC’s relation

Recently, when OPEC meeting was held in response to the crashing market as an effect of coronavirus, some harsh decisions were taken. The cartel suggested that all the members should collectively cut their production by 1 million barrels per day. This was a huge step considering the situation at hand. Russia had to make a dramatic cut of 500,000 bpd. It would have kept the prices higher and drive revenue to the nations. But Russia wanted otherwise and parted its ways. The reason for this is still unknown. Some say that maybe Russia wanted to hurt the shale industry of America by keeping the prices low.

Corona Pandemic: What’s ahead of this crisis?

The whole situation is quite liquid at the moment and it is unsure what the future will look like once the situation starts to stabilize. The companies around the world are cutting their budget and spendings for the rest of the year. And this directly points out to the ancient trend of the industry, layoffs. “As these drilling rigs are idled, we’re going to have layoffs in the next four to six weeks”, says Andy Lipow, the President of Lipow Oil Associates in Houston.

The industry will again be tested for its patience and resilience, the industry experts will have to toughen up for whatever lies ahead. The search for a fine balance between the demand and supply will begin again. We cannot emphasize enough that a lot depends on how fast the governments are moving to curb the spread of the virus and what will be the state after it is over. For now, we all hope that the effect of coronavirus is not longlasting and wrecking.

Stay indoors, stay safe!