With the large-scale quarantines, travel bans, and social isolation measures necessitated by the Covid-19 pandemic, there is expected to be significant ramifications for global demand hubs and supply centers—including those in the oil and gas sector. These have already led to a sharp decline in consumer and business spending in Q1 2020, and is expected to continue through 2020.
If the Covid-19 driven erosions of crude oil demand weren't enough, then the fall-out of the OPEC+ alliance has further dented the oil markets. Although it is possible that the strategy of Russia, Saudi Arabia, and the UAE to influence oil markets could be short-lived, we can't deny that the adverse demand effects could extend throughout 2020, given the substantial stockpiling and lack of clarity around the Covid-19 containment.
US Shale players have once again fallen victim to their debt-heavy balance sheets. Moreover, operationally weak producers have already started restructuring efforts in the face of solvency issues, and others with more agile portfolios have lowered 2020 CAPEX commitments to preserve cash, and hope for oil prices to recover from 2021 onwards.
Overall, 2020 will be marked by an oil supply glut, however it will be 2021 wherein we could truly expect the recovery to begin (assuming that the demand effects of Covid-19 are mitigated by then). From our perspective:
- Covid-19 causes oil oversupply shock: Demand erosions will unlikely diminish before Q3 2020. Significant crude stockpiling amidst OPEC+ supplies could weight on markets well into 2021.
- Inflexion point for O&G sector after OPEC+ fall-out: The oil price war could be short-lived which can be owed to economic dependence on oil, pressure from smaller OPEC nations, and making-out of storage capacity.
- Fate of the US producers hangs-in-the-balance: CAPEX reductions and debt-pressures could plateau production by 2021 as distressed E&Ps face solvency issues, and survivors hope for markets to recover.
- When will the oil markets rally again: Demand effects will weigh in on prices during 2020. OPEC+ regrouping early and slow-down in the US production could accelerate recovery during 2021-22.
Read a detailed analysis on Covid-19—Repercussions for Oil Market. Download the whitepaper by clicking on the link below.