The oil markets have faced a hit from two directions. The Coronavirus outbreak, on one hand has drastically reduced economic activity, slowing down travel, and reducing demand. On the other hand, the oil price war could lead to a major oversupply as Saudi Arabia ramps up production. This escalation in production alongside negotiations failing across two super-powers, will significantly dent the long term prospects of the oil industry insight-fully discussed with the external analysis adopting the PESTLE framework on SWOT & PESTLE.com
The “OPEC+” pact formed after Russia had joined OPEC in 2016, along with other nine non-member countries, controlled almost half of the world’s oil production. It holds immense power over the most critical commodity of the world. OPEC’s biggest producer and its driving force, Saudi Arabia wanted to reduce output in order to prop up prices as Coronavirus ruined the energy demand. Russia astounded oil traders when it refused to cut production along the lines pushed by Saudi Arabia. This blowup of Russia’s alliance with OPEC set off a sudden price war.
The impact of this price war has been experienced far and wide in the industry. A multinational oil and gas company BP plc based in London; England experienced a crash in shares from 18.8% to $25.39 which translates to approximately $20 billion in lost market value since the close of markets. The Saudi state-owned oil company, Saudi Aramco, plans to offer major discounts to win over buyers. It aims to boost production to more than 10 million barrels a day.
UAE’s oil giant, ADNOC, has also decided to boost its oil production, committing to increase supply to over 4 million barrels per day in April 2020 after the collapse of the OPEC+ agreement and the oil price war between Saudi Arabia and Russia.
ExxonMobil, an American multinational oil and gas corporation based in Irving, Texas, is also planning to significantly reduce its spending in response to the market conditions caused by the Coronavirus pandemic and decreases in commodity pricing. Royal Dutch Shell, a British-Dutch oil and gas company based in the Netherlands faced a drop from 14.1% to $18.23 per share which translates to $25 billion in value lost.
Halliburton, the largest source of hydraulic fracturing services in the U.S. shale patch has added to the ranks of oil companies engaged in spending-cutting spree amidst the oil price drop. The company is aiming at cuts of up to 60-65 percent in some parts of its business. Halliburton plans to furlough 3,500 employees for two months. They will only be paid for the weeks worked. Despite its size, Halliburton is already feeling the pain from the oil price war, with its share price collapsing by 70 percent over the last four weeks.
The oil price crashed by more than 50% to less than $25 a barrel following the OPEC-Russia price war. If this sustains, it would devastate national budgets of petroleum dependent states like Venezuela, Nigeria, and Iran, thus becoming a source of threat to upend global politics. 2020 is likely to suffer the greatest decline in oil consumption, even if demand recuperates to normal levels by the middle of the year.
China’s recovery from the virus will be crucial for the global economy since it is the world’s largest oil importer. China’s demand for oil is slowly recovering after being reduced by at least 20% in February when Beijing was locked down to slow the spread of the Covid-19. However, the nation’s demand still remains at the level of a year ago, despite the recent improvements.
The U.S. which was earlier an importer of oil and thus a beneficiary of low prices is now an oil exporter. It is feared that sudden surges in oil prices will likely increase the costs to an unreasonable level across the globe thus, contributing to slow economic growth. Now a world already staggering to endure the economic collapse triggered by the virus is also experiencing another sort of oil shock.
Sep 20, 2019