Mayhem in the oil market!
Massive shock to the oil market is an opportunity for companies and nations to shore up for their energy vulnerabilities
These are crazy times! The price of crude oil which has been sliding in a freefall over the last fortnight, went into the negative for the first time in history on April 20, 2020, as demand dried up and storage space became scarce! The May 2020 Futures traded at -$37.63 per barrel as there were no one to take physical delivery and the May contract was expiring on April 21, 2020. However, the futures trade for June 2020 bounced back to $20.04 per barrel showing the true sentiment of the market. This tiny Coronavirus has disrupted the energy world and has brought it to its knees. IEA calls it the 'Black April' of the energy markets. At this price ($20/bbl), no company can sustain production except maybe Saudi Arabia. Countries with the oil-based economy will be bearing the brunt of taking hard decisions to finance their budget.
Several companies have stopped drilling and many have curtailed their production as operations become unviable and storage tanks become full. Oil companies and even oilfield service Companies have laid off hundreds of workers to cut their overheads.
The energy world went into a tizzy during the first week of March 2020 when the market, already bracing for the fall in oil demand due to impact of Coronavirus, were shocked to see the battle for oil take a serious turn when Saudi Arabia decided to increase its production and slash oil prices in reply to Russia's refusal to join OPEC in production cut to stabilise oil price with demand severely affected due to the pandemic. During the second week of April, parleys between OPEC, its allies and Russia ultimately resulted in a deal in which they agreed for a cut of 9.7 million barrels per day oil production. The duration of the deal was for a period of 2 years. Doubts, however, were cast as to how long the deal would hold.
The low crude oil price is good news for countries like India who rely on the import of crude oil. One of the largest importers of oil, India now needs to take this opportunity to buy as much oil it can store for its use in the future. India has a capacity of 5.33 Million Tonnes in caverns for its Strategic Petroleum Reserves(SPR). Besides the SPR, we can also explore possibilities of borrowing storage space which may be available in other areas like chemical industries, railway tankers, etc. We could even cut down our own production to levels where oil wells in the fields can be shut without damaging the reservoirs and process only imported crude until it becomes viable to produce from our own fields.
The demand for petroleum in India has been badly affected due to the lockdown. In April, the demand slumped around 70 per cent, as manufacturing, transport and aviation industry came to a halt.
One thing is for sure, this will not be business as usual in the future. The oil industry will have to bring in changes in the way things are run. With large producing countries like Saudi Arabia, the UAE, Russia, etc., who depend largely on oil revenues to finance their country budget, it will be prudent for them to effectively reduce costs and bring in innovative methods to increase their efficiency. Where the US is concerned, it will be even more relevant to innovate and cut overheads as the shale oil requires continuous drilling of new wells to keep up production. Shale players require a steady flow of capital. There are a number of small companies operating in the US, producing from the shales and most of them require oil price above $45 to make their operations viable. How long can such companies survive without steady cash flows to sustain operations? This can only happen once the demand for oil picks up once the pandemic abates, manufacturing units start operations and travel restrictions are removed around the globe.
The oil and gas companies will now have to swiftly learn from this mayhem and come up with strategies to ensure that they have a competitive edge. They will also have to be prepared to bear the onslaught of such shocks in this ever-changing world.
The writer is a retired Executive Director of Business Development, Oil India Limited