Impact of COVID-19 on the oil sector

Impact of COVID-19 on the oil sector

Globally with nearly 2.5 million people who have infected and 0.17 million have died due to novel coronavirus (SARS-CoV 2), economic activities have restricted across the globe.

Nearly every sector of the global economy has been impacted badly due to the pandemic. The global economy is going to shrink by up to 1 percent in 2020 and contraction will be further if adequate fiscal responses are not taken, UN said. This will create great distress in the economy and it is the start of the recession. This type of unprecedented issue has never faced by mankind in history. The oil sector is no exception!

 

The story so far:

The oil sector is in the midst of two crisis that is creating an unprecedented situation that could last well into 2021-Drastic fall in oil prices and impact caused by COVID 19.

First, in the early March at a meeting in headquarters of OPEC in Vienna, Russia and OPEC failed to agree on oil production cuts. So, Saudi Arabia initiated a price war by increasing oil supply. This led to the filling up of all oil storage of the world's capacity. Although Russia and Saudi Arabia ended the price war by signing a landmark production-cut deal on the 12th of April, the situation is no better. OPEC + and Saudi Arabia have greatly increased the supply of oil resulting in a steep fall in oil prices.

Second, COVID-19 has caused demand destruction that is expected to result in about 3-5 million barrels per day by the end of 2020. Gasoline demand has fallen by about 1 million barrels per day and global jet fuel has been reduced by about 0.5 barrels per day as a result of demand-side shock caused by a novel coronavirus. Precautionary measures to prevent the spread of the virus, including lockdowns and restrictions on economic activities, have resulted in industrial slowdowns and travel bans, which have brought economies around the world to a standstill. All this leads to a sharp drop in oil demand.

 

Prognosis:

Due to the double shock in this unprecedented situation, the global recession in 2020 is expected to contract the demand for oil for the first time after the global recession of 2009. The oil sector will be changed forever due to the unprecedented decline in oil. As for natural gas, the onset of a recession will affect demand, although not as much as oil.

Companies are in a lot of trouble because they are unable to make money. Some companies such as Chesapeake Energy (CHK) and Oasis Petroleum (OAS) will certainly go bankrupt as they have incurred huge debt, which is facing maturity and are unable to generate cash flow to make even their interest payments.

 

It is estimated that more than 1 million workers will lose their jobs in 2020. This accounts for about 21% reduction in the global oilfield service (OFS) industry. Out of 21℅ job cuts, 13 % are linked to oil price collapse while 8% are linked directly to the virus.

Since the situation is very uncertain, it would be difficult to assess the full impact of the virus. But, certainly, the combined effects of the oil-price war and COVID-19 have already affected the price and trade of crude oil. Falling crude prices have already caused a considerable crisis in the upstream sector among investors. A few analysts are expecting in a pessimistic view that some of the oil-exporting nations would go bankrupt. But this theory now seems irrational, at least to me.

 

Need for government intervention:

The global oil industry is already in a state of turmoil. COVID-19 certainly pushed the oil industry to the edge. For the oil industry to exist, Operations will need support from the respective government institution in its country of operation or origin. Oil Companies can use their cash reserves to tide over the current situation in the short run. But to remain efficient in the long-term, the capital-intensive upstream sector will have to struggle seriously. Government institutions should intervene in the current pathetic situation, this is very high time. Policymakers should look after the oil industry as a revival of the oil industry whose key to reviving the economy.

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