Oil could see another demand shock, adding to the ‘extraordinary’ destruction this year

SINGAPORE — The subsequent huge shock to the oil business could be but another hit to demand, analysts stated.

That would add to the destruction already seen this year as measures taken to fight the pandemic prevented folks from commuting and touring – drastically lowering oil utilization.

Speaking at S&P Global Platts’ Platts Asia Pacific Petroleum Virtual Conference (APPEC) 2020 on Monday, analysts pointed to the chance of a second wave of Covid-19.

“A lot of us, we’re talking about another demand shock. It’s like fighting the last battle,” stated Ed Morse, managing director and international head of commodities analysis at Citi.

During a panel dialogue at the convention, he warned that oil producing nations could expertise an enormous setback.

“We’re seeing countries that are overly dependent on oil earnings, that can’t pay for the civil service, can’t pay for healthcare…education…security,” Morse stated. “The rate of concern we’re going to see … dipped in demand and the gigantic build in inventories … I think the biggest worry is what happens to the fragility of the oil producing countries.”

Earlier this year, the May contract for U.S. benchmark West Texas Intermediate crude dived deep into damaging territory for the first time in its historical past, amid lockdowns and an absence of storage as oil stock quickly constructed up.

“I think it is still all about the demand, the demand destruction this year has been extraordinary,” Martin Fraenkel, president of S&P Global Platts, which projected that the contraction in international oil demand can be eight million barrels a day by the finish of this year.

“That’s a huge contraction year-on-year in a typical year …. Now we’ve come off the summer driving season in the U.S., we’re expecting that demand to taper off a little bit, and of course we’re seeing an uptick in infections of Covid-19 in many parts of the world … and that is a concern,” he stated.

“By the end of 2021, oil demand will still be below where the world was in 2019,” Fraenkel added, talking to CNBC on Monday.

OPEC+ has a “delicate maneuvering act” if demand doesn’t bounce again, Fraenkel added,  referring to the Organization of the Petroleum Exporting Countries (OPEC) and its allies.

In July, OPEC+ put in place historic supply curbs of 10 million barrels a day, however agreed to ease them to 7.7 million barrels a day from August.

“If demand doesn’t come back, how long is OPEC+ going to be able to sustain cohesion to keep supply under control when prices are hovering around $40 per barrel? While we think prices can go up in 2021 modestly, (will) demand growth keep coming back? It’s by no means an assured route,” he stated.

“In that environment, that cohesion among OPEC+ is going to come under strain. Because as we know there’re a number of countries , Russia being one… which are really dependent on the oil prices and their oil revenue, so the longer this goes on, the more under pressure they’re going to come,” Fraenkel warned.

Oil pipelines, pumping rigs, and electrical transmission strains dot the panorama alongside California’s “Petroleum Highway” (Highway 33) working alongside the northwestern facet of the San Joaquin Valley on April 24, 2020, close to McKittrick, California.

George Rose | Getty Images News | Getty Images

Demand for diesel, on the different hand, is recovering sooner, stated analysts at the convention.

As deliveries from on-line purchasing ramp up amid the pandemic, that is placing extra supply vans on the street, identified Chris Midgley, international head of analytics at S&P Global Platts.

“Diesel, it’s reacted much more quickly.  We have the trucks, and the lorries, and the freight being carried around the country, the food and the supply,” stated Felipe Bayon, CEO of Ecopetrol, a big oil and gasoline conglomerate in Colombia. He was commenting on when demand for gas in Colombia will recuperate to pre-coronavirus ranges. “I think the big question is around jet fuel … I think we’ll just take much longer.”

Investment in oil another ‘key stress level’

The vitality sector is about to see a “huge hit” on investments, stated Ahmed Ali Attiga, CEO of Arab Petroleum Investments Corporation.

About $80 billion of capital expenditure cuts in 2020 have already been introduced, which represents a greater than 30% decline over 2019’s funding price range in the sector, he identified.

“I think that’s where a key pressure point will evolve,” Attiga stated.

“From a funding perspective, the energy sector in general faces two key problems. One is the relatively low shareholder return, and the second is the squeezed margins across the value chain,” he stated. “This phenomena in the energy sector … poses key challenges for where financing is going to come from, and particularly so in a period of acute crisis.”

One resolution, Attiga stated, could be utilizing fairness to deal with the lack of funding. Opportunities could be recognized the place distressed property have change into in want of financing, which current an “attractive investment opportunity.”

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