Page 6 - AfrElec Week 11

AfrElec COMMENTARY AfrElec
Oil prices collapse as
COVID-19 wreaks havoc
WTI and Brent are now trading at levels not seen since the early 2000s
AFRICA
WHAT:
Oil prices have plummeted to levels not seen since the early 2000s
WHY:
The COVID-19 crisis has sapped demand, while an impending supply war between producers is set to exacerbate the market glut
WHAT NEXT:
Saudi Arabia and Russia appear committed to a prolonged struggle for market share, with both seeing US shale as a key target
OIL prices plummeted to levels not seen since the early 2000s in early US trading on March 18, as the coronavirus (COVID-19) pandemic con- tinued to sap demand.
By 12:00 US Eastern Daylight Time (EDT), West Texas Intermediate (WTI) futures had slumped 15% to $22.90 per barrel – their lowest level since 2002. Brent, meanwhile, was trading at $26.16, its lowest level since 2016, after dipping to $25.40 hours earlier – its lowest point since 2003.
Governments across the world are declaring lockdowns, grounding flights and encouraging citizens to stay at home, causing fuel demand to collapse. At the same time, Saudi Arabia, Russia and other OPEC+ members are gearing up for a supply war next month, after their existing pro- duction quotas expire. The alliance of producers ended more than three years of co-operation to rebalance the market earlier this month, after Russia refused to agree to extended, deeper cuts.
“I’ve never seen anything like this. We’ve never simultaneously had demand destruction from one event at the same time that supply is being increased and flooding the market,” Andrew Lipow, president of Lipow Oil Associ- ates in Houston, told Reuters.
Grim forecast Goldman Sachs expects Brent to fall to just $20 per barrel in the second quar- ter, predicting that global oil demand will drop by a record 1.1mn barrels per day in 2020. For context, consumption fell by only 840,000 bpd in 2009, in the aftermath of the global financial cri- sis the previous year, according to BP statistics.
Oslo-based Rystad Energy is more bearish, predicting a decline of 2.8mn bpd, or 2.8%, to 97.1mn bpd. Demand in April will drop by as much as 11mn bpd year on year, the consultancy predicts.
Rystad expects jet fuel demand to drop by 12% y/y in 2020 – equating to at least 800,000 bpd, as global commercial air traffic falls 20% to less than 80,000 flights per day. Even once quar- antines are eased, the industry will take time to resume previous levels of business after making such drastic cuts to spending.
“Many distressed airlines are now facing heavy cost cuts, laying off unprecedented num- bers of employees, and many non-essential routes are likely to be closed,” the consultancy said.
Meanwhile, road fuel demand is slated to decrease by 2.2%, or 1.1mn bpd.
The coronavirus crisis and Russia’s sudden exit from OPEC+ are black swan events that have forced producers across the world to slash spend- ing significantly and delay projects. As recently as February, analysts polled by Bloomberg, Reu- ters and others were predicting an average price for Brent of around $60 per barrel for 2020. If oil remains at the current level for months, opera- tors will have to go a step further and shut down existing production that is no longer profitable.
US shale drillers in particular took a serious hit from the price collapse, and warnings have been sounded over a wave of bankruptcies that could be looming.
Extra barrels on the way
Under normal conditions, such low oil prices would spur a recovery in fuel consumption, in turn triggering a rebound in prices. But with quarantine lockdowns coming into force across Europe and the US declaring a state of emer- gency, demand will be unresponsive.
Similarly, the closure of unprofitable pro- duction would also normally help rebalance the market. But Saudi Arabia has promised to
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w w w . N E W S B A S E . c o m Week 11 19•March•2020