Opinion

What are the 'new normals' for oil post C-19?


As the COVID-19 virus was starting to spread and we were seeing lockdowns in Europe, the OPEC+ agreement on crude production started to fall apart and Saudi Arabia and Russia squared-off against each other in a fight for market share.

They announced plans to boost production by as much as 3 million barrels a day. Increasing supply whilst demand was reducing was only ever going to end in one way, it was just a question of time. Saudi Arabia and Russia finally let the principle of the “greater good” prevail and there is now agreement to cut production. Although it was hailed by many as a major triumph, the market took little solace - after all they were only cutting 9.7million barrels a day and supply would still exceed demand.

In this situation the outcome is obvious; prices had to fall until the demand increased to balance supply. Unfortunately, with increasing lockdowns, the consensus was to be that demand had fallen by 30million barrels per day and no one was able to take advantage of low prices. If the demand cannot increase, supply needs to be reduced, but this would mean shutting in wells, which can result in permanent damage to the reservoir – something oil companies try to avoid at all costs. So, the only option left is to put the oil into storage – but what happens when the storage is full?

In mid-April, the United States Oil Fund (USO) – which in fact has nothing to do with the US Government – needed to sell its contracts to buy WTI because it isn't able to hold physical assets. Unfortunately, everyone knew this and no one wanted to be a buyer - the primary storage location for WTI is in Cushing Oklahoma and is almost full and you can't take delivery of crude oil without having somewhere to put it. The only solution was to pay people to take the crude oil, which is why we saw negative oil prices. The other global benchmark, Brent, remains at around $20; because it isn't restricted like WTI and there has no equivalent to the USO. Although the price of Brent has continued to slide it hasn't experienced the dramatic moves that we have seen with WTI. Until demand returns or supply reduces, as global storage fills up, the price will remain weak and is likely to keep falling. A negative price is unsustainable, production will be cut and on average crude prices should stay positive.

Normally, a low oil price is good for the global economy. A reduction in the price of energy encourages business growth as costs are less. However, the real issues we are facing are two-fold; has the pandemic reduced demand to the extent that in some sectors there is a long-term reduction or even destruction, and how quickly can demand actually recover if parts of the world remain in lockdown? The debate over recovery is gaining momentum, but the global economy is a complex set of interconnected markets. No one country has a monopoly on growth, so we all need to worry about each other. The path to recovery is likely to be bumpy and everywhere will be moving at a different pace. It's likely to therefore be more of a wide U-shape than a quick V-shape.

Whatever the path, oil will be a critical element of the recovery. Even though there isn't much we can do to stimulate demand, the sector must prepare for recovery: positioning all aspects of the value chain to supply energy to countries, communities and individuals.

Transportation is a key facilitator of global trade, especially marine transportation. Land transport, trucks and other vehicles are an essential step in the delivery process. So, fuel oil and gasoil demand will likely start returning towards normality as the recovery progresses. But what about air travel? Cargo flights are part of moving goods around the world, but how quickly will people return to the skies. We have already seen some airlines talking about leaving seat empty to help with social distancing.

This will obviously increase the cost of tickets – half the number of passengers means half the revenue despite similar costs, so ticket prices should be expected to rise. If people don't fly, they will probably do more driving – staying in the bubble of their own car, so gasoline may even return to higher levels.

There still remain two key questions:

 

How quickly will demand start to return? This summer, by the end of the year, next year? No one actually knows

How much demand will return? Same, higher or lower demand? And it may be different answers for different fuels.

There is also another issue which is even more complex. Before the pandemic, the oil business was reasonably balanced with refineries generally producing the mix of fuels the world requires. The pandemic has shaken up the demand picture and the future mix of fuels may be very different e.g. less jet fuel because of less flights. This means that the refineries may need to change the way they operate and produce different proportions of each fuel. The consequences may be that some refineries are no longer economic and are forced to close, it also means that “normal flows” may change. It may also provide opportunities for new energies – when demand starts to pick up maybe the world will use it as an opportunity to take a step towards cleaner energies.

We are now starting to see countries “unlock” and demand will of course follow, though it is likely to be sporadic and regional which can complicate things. The oil market is exceptionally robust and will bounce back, but it would be a mistake to miss this opportunity to learn from the current challenges and build greater resilience in our supply chain for the future.

In this area, we are happy to lead by example. Resilience has always been a part of Sahara Group's approach across the African continent, building a business that learns from the market conditions in order to adapt to and meet current requirements and changing circumstances. What is the secret? Diversification. Our presence across the continent's supply chain from Nigeria to Tanzania and from Mozambique to the DRC has made room for this agility, weaving business continuity into the core of our work by constantly assessing where supply and demand exists and acting swiftly and efficiently to shift and re-balance the supply chain. The world will continue to need energy and Sahara Group, buoyed by its vision of bringing energy to life, will work alongside other energy conglomerates and stakeholders to help meet global energy requirements with pan-African solutions.

 



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ResilienceSahara GroupAfricaenergy market