The historic oil price collapse we have witnessed is just the beginningby Nick Butler / May 21, 2020 / Leave a comment
The Covid-19 pandemic may have passed its peak in Europe but the full impact of the virus and the lockdown policies adopted across the world have only just begun to be felt. What has happened so far is triggering a chain of further events and consequences. The energy sector, starting with the oil and gas business, is a prime example of this process.
The immediate impact of the lockdown, first in China and then in March across Europe and parts of the United States, was a 3.8 per cent fall in global energy demand in the first quarter according to the latest authoritative estimates from the International Energy Agency. That figure is likely to be many times higher in the current quarter as a result of the lockdowns which at one point affected more than half the world’s population.
Oil demand alone fell by 29m barrels a day in April. The impact of the lockdown was compounded by the competition for shares of the market between the members of OPEC, Russia and the United States. An excess of supply met falling demand and the result was a halving of prices. Shares in the major producers collapsed. Shell and Exxon, two of the strongest companies in the world on most measures, both saw their valuations drop by more than 50 per cent in a matter of days. In the US oil prices even briefly turned negative in April, as local storage facilities filled up and buyers disappeared.
Since then, prices and valuations have risen a little as lockdowns have been eased and as production has begun to fall. OPEC and other producers have reached a partial agreement to take supplies off the market. In the US the production of oil from tight shale rocks has started to decline as producers shut in uneconomic wells.
The problems for the energy business, however, are far from over.
The first of these is likely to surface over the next few weeks. Supply continues to exceed demand. April and May saw the sharpest falls in demand but the agreed supply cuts are being implemented more slowly. The result is that stocks on a global basis keep rising week by week, to…