With most countries entering recession, booming oil prices are not on the immediate horizon.
With 187 countries in lockdown and global transportation at a standstill, the oil industry is on the brink of collapse.
For the first time in history, US oil prices crashed below zero on April 21. Traders had to pay customers to take barrels off their hands.
“The physical markets couldn’t absorb the production because storage options were full, so the holders of May-dated futures contracts had to take delivery or find a buyer, which resulted in negative pricing,” says PwC’s Global Energy Advisory practice leader Reid Morrison.
Tim Bray, senior portfolio manager, private markets at US-based GuideStone Capital Management, says usually traders that can’t take delivery don’t wait until the day before settlement. “I suspect they will not make that mistake again,” he says.
In the rest of the world, oil has rarely been cheaper. Brent crude, the international benchmark, fell below $20 a barrel in April, the worst slump in oil prices since the late 1990s oil price shock, when Iraq invaded Kuwait. Prices are expected to remain low as barrels have nowhere to go.
With land reservoirs nearing full capacity, some traders are stockpiling barrels on ocean tankers, but rental prices for those are skyrocketing and the number of ships available is limited.
In an attempt to mitigate the crisis, in mid-April, the world’s largest oil nations agreed to the biggest production cut ever: 9.7 million barrels a day, which is approximately 10% of the global output. But the International Energy Agency (IEA) forecasts a drop in demand in April of as much as 29 million barrels a day year-on-year, followed by another significant y-o-y fall of 26 million barrels per day in May.
“No coordination will be enough to save the energy industry from being decimated,” says Bray. “The crisis can only be ended by reopening economies, because the current hit to oil demand is three times as large as the OPEC+ agreed upon production cuts.”
Even if travel restrictions are eased in the second half of the year, the IEA predicts that global oil demand in 2020 will fall by 9.3 million barrels a day y-o-y, erasing almost a decade of growth.
With millions of jobs and businesses on the line, policymakers around the world are implementing emergency fiscal plans and monetary stimulus packages. Meanwhile, oil-pumping hasn’t stopped. For most operators, it is cheaper to operate at a loss rather than shut down production and restart.
“There are costs associated with shutting down production, and also operators don’t want to lose market share,” says Bart Cornelissen, managing partner of Monitor Deloitte, Deloitte’s strategy practice in the Middle East. “On top of that, there is always the geopolitical dimension to consider.”
With most countries entering recession, booming oil prices are not on the immediate horizon. On the contrary, cheap oil will be a necessity for global economic recovery. “The economic damage is more severe than we’ve ever seen so there is no playbook,” says Morrison, “but one of the best solutions to step out of recession is cheap energy, which we will have for the near and medium term.”
