It is no secret that the coronavirus pandemic has wreaked havoc, but the industry in the most turmoil now is arguably the oil sector. The lockdowns have decimated oil demand, particularly for transportation fuels, and especially jet fuel and gasoline, and caused ripple effects across the global economy.
Prices of petrol at the pump have fallen significantly in many countries — but consumption is declining as well. Given various lockdowns and movement restrictions, many consumers have changed their daily routines and habits, minimising driving, curtailing trips both for business and leisure. A quick drive to the shops to buy essential items is often the only time the car is used.
As a result, the fall in pump prices is not something that many consumers have been able to take advantage of in the immediate term. S&P Global Platts Analytics estimates that as a result of weaker global GDP and increased lockdowns, global oil demand is forecast to decline by 8.7 million barrels per day for the year with a contraction of 18.9 million bpd in the second quarter.
This is the worst case of demand destruction ever witnessed in modern times.
Refining suffers adversely
In response, oil refineries have throttled back their processing volumes to mitigate this sudden loss in consumption and to preserve positive margins. Global refining capacity is currently around 100 million barrels a day, and shut-ins along with idled capacity reached nearly 20 million bpd in late April, as refiners either lowered operating rates or halted operations altogether.
With the majority of the global population staying home, the resulting crash in oil demand has caused oil prices to fall nearly 80 per cent since the start of the year.
Benchmark Platts Dubai crude, which represents the price of a barrel of medium heavy sour crude for loading in the Middle East — arguably the most consumed type of crude in Asia — tumbled to a low of $13.55 on April 22, as sellers struggled to find buyers. Platts Dubai price assessments have averaged $20.76 per barrel, month to date, in contrast to $33.70 per barrel in March and $54.22 per barrel in February.
Nothing escapes the rut
Other crude oil grades have not been spared. In the North Sea, Platts Dated Brent represents a more prompt loaded barrel of lower density and lower sulphur or light, sweet crude oil and this price has also declined. In the US, WTI Nymex crude futures remarkably went negative and settled at a low of minus $37.63 per barrel on April 20. This reflected limited storage availability in inland parts of the country forcing financial players without access to storage to close out their financial contracts to avoid taking physical delivery.
The pain has been felt most acutely by upstream producers of crude oil, which must now make difficult business decisions as prices are now below break even levels for many projects. Crude production is not a uniform matter and there are thousands of oil companies, all with different economics.
Middle East realities
Oil producers of onshore crude oil in the Middle East typically have some of the lowest production costs, but these countries are also highly dependent on oil revenues to fund national budgets. Many of these countries have nationalised oil companies and they are able to augment production as they see fit.
However what we have seen in recent weeks is that despite the largest agreed production cuts in history between Opec and its coalition of partners, crude prices remain sharply lower than before the coronavirus outbreak.
In contrast, in the US, there is no national oil company and there are a myriad independent producers with their own economics, some of whom will have earlier hedged their oil production at specified oil price levels and therefore could be incentivised to continue production.
S&P Global Platts Analytics believes the Opec+ production cut of 9.7 million bpd isn’t enough to plug the huge near-term imbalance in the marketplace. The world is rapidly running out of storage for crude oil and the price should act as a signal to producers to cut output to rebalance the market, as without demand at the levels seen just a few months ago there are very few benefiting from the current situation.
- Dan Colover is Structured Market Engagement — Middle East, S&P Global Platts.