By: Nidal Abou Zaki, Managing Director, Orient Planet Group
As the international community scrambles to contain the spread of the new coronavirus disease (COVID-19), the enormous impact of the ongoing health crisis has been felt immediately across industries. In the global oil sector, the effects became evident after prices declined in unprecedented levels during the first quarter of the year.
According to the International Energy Agency (IEA) Oil Market Report, the global oil demand in 2020 is expected to plunge by a record 9.3 million barrels per day (bpd) year-on-year compared to 2019 even if travel restrictions are to be lifted during the second half of the year. The report states that “almost a decade of growth” will be wiped out as a result of the pandemic. In April, the unthinkable took place. West Texas Intermediate (WTI), the US oil benchmark, entered the negative territory for the first time.
Restricted movement of people and goods had brought down orders for transport fuels, with the IEA citing particularly the weak demand for petroleum products from China, where the new strain of the coronavirus had first emerged, at the height of its battle against the crisis.
The Asian superpower is the globe’s largest energy consumer. In 2019, the country accounted for over 80 percent of the global oil demand growth as per the IEA’s study, while a separate online report noted a 2018 data showing the country’s annual consumption of 13.5 million bpd of crude oil — 62 percent of which were imported. The slowdown in China’s economic activities, including those in the local ports, and manpower issues following a prolonged lockdown order had further compounded the demand volatility.
A recent Bloomberg report, however, stated that the country’s oil demand “has rebounded to pre-coronavirus levels” after exiting the lockdown phase. This serves as good news for the entire oil industry waiting for the global demand to rebound from its worst level yet.
On the supply side, the differences between Saudi Arabia and Russia, two of the biggest international oil producers, had pulled the oil prices down as well. The conflict sparked after talks in Vienna on the planned response of OPEC+ to COVID-19 fell through.
During the gathering, the Kingdom initially proposed to cut OPEC’s production levels to 1 million bpd and Russia’s to around 500,000 bpd to put a stop to the tumbling oil prices due to weak demand from Asian countries affected by COVID-19. Russia had opted, however, to not follow the plan due to still unclear reasons, prompting the Saudi Government to cut its export prices in retaliation.
As a result, more supply flooded the market amid dwindling demand. Oil prices went down considerably – crude cost was at over $50 a barrel before the conflict – which affected the US oil industry as well. This prompted United States President Donald Trump to take steps to stop the conflict. Following talks between the US and Saudi Arabia, OPEC+ had agreed to cut production by a record 9.7 million bpd, which is reportedly equivalent to an estimated 10 per cent of the global supplies.
With the latest development, IEA Oil Market Report expects that the supply level will decrease by 12 million bpd this month alone. The report sees more reduction from other major producers as well such as the US and Canada. The IEA predicts the total output for 2020 “may be 2.3 million bpd lower than last year.”
The oil prices have slightly recovered as some economies reopen and the oil production level goes down. On May 18, reports said WTI crude increased to $33.32 per barrel, while the international benchmark Brent crude surged to $35.72 at intraday highs.
The number of COVID-19 cases and the death tolls continue to climb globally, with authorities racing against time to find a way to contain the spread of the infectious disease. As drastic measures with great socio-economic impact remain in force to fight COVID-19 and protect public health, many economies, especially the developed ones, have rolled out the needed coronavirus stimulus package to cushion the immense economic impact of the virus. Other countries are expected to follow suit to help their citizens and residents cope and tide them over given the present circumstances.
On the outlook on the oil industry, experts are cautious as they monitor the ongoing developments. The world awaits how this global crisis will end. We can only hope for better, more positive events, including the development of the much-awaited vaccine against COVID-19, to provide the entire international community with the needed relief.