The Pandemic that Hit the Oil Patch Seems to be Stabilizing
It came out of nowhere, no one saw it coming – a global pandemic causing major world-wide lockdowns including the world’s top two oil consumers, China and the United States. At the same time an oil price war erupted between two of the world’s largest oil producers, and to make matters worse there was a supply surge from US shale producers. This perfect energy storm converged to create the most sudden and dramatic demand dip in the industry’s history.
The year started out with a global pandemic glooming – oil demand was at 3.8 million bpd – lower than a year earlier. Demand continued to decline, April being the worst month with demand down by 25% – compared to levels before the virus hit.
“It was “hands down” the worst oil crash in recent history,” said Matt Gallagher, chief executive of Parsley Energy, one of Texas’s biggest independent oil producers. More bad news hit US shale producers when capital markets largely closed as investors left the sector because of its inability to repay debt.
A Few Short Months Later – Global Demand for Oil is Bouncing Back
To get the engine started, OPEC+ cut output by 9.7 million barrels per day (bpd) in May and further cuts of 7.7 million bpd are expected until December. Saudi Arabia’s energy minister Prince Abdulaziz bin Salman said OPEC+ is moving to the next phase of its oil cut pact. The group started cutting supply by 10%, after the COVID halted global demand by one third.
Even though the pace of economic recovery has slowed in several major economies, including the U.S., Canada and the U.K., due to outbreaks of COVID, oil prices have started to steady with demand coming from China, India and parts of the EU.
“Global oil demand is expected to recover significantly in August, climbing to be within 10% of the level that the world saw prior to the coronavirus pandemic because of the sharp drop in US oil supplies, along with OPEC+ easing supply. “ said Russia Energy Minister Alexander Novak said last Thursday (July 16,2020)
Why the “2nd Wave” Won’t Crush Oil Prices Again
There are a couple of reasons why oil prices are not likely to fall to the levels they did in April.
- First, the initial health crisis appears to be under reasonable control in many countries. Slow but steady re-openings are occurring. Lifestyles are starting to return to a “new normal”.
- Second, the world now has a much better idea of how to deal with COVID than it did four months ago. To some degree, businesses have begun adapting to the changes the virus has brought to day-to-day operations.
- Lastly, biopharma companies appear to be making serious inroads to finding a Covid-19 vaccine. Demand is expected to increase to pre-Covid levels sooner than later.
What does that mean for the Canadian Oil industry?
The effect of the global pandemic on energy demand and a brief price war between OPEC and Russia sent oil markets in Canada tumbling in April, forcing producers to scramble to withstand uneconomic prices. In response Canadian Oil Sands producers voluntarily curtailed about 60,000 barrels per day (bpd) of output in March and April.
Since then Canadian petroleum producers have slowly started to increase production.
“I believe we have made it, by far, through the worst of this situation,” said Cenovus Energy CEO Alex Pourbaix , “As we see commodity prices grow, we are seeing a strong price signal to bring production back.”
Husky Energy stopped pumping about 80,000 bpd earlier this spring. It is now constraining output by about 40,000, but expects “to be through the shut-ins in July and August,” said chief financial officer Jeff Hart.
“Nobody should be surprised to see our production moving back to full production capacity. And we are significantly cash-flow positive at the (price) levels we are at right now,” Alex Pourbaix of Cenovus said.
In early July, Suncor Mark Little said, “The price is actually pretty good right now. I think the price is strong enough that every producer in the world could justify bringing their crude back to market.”
Canadian crude oil prices are expected to strengthen and natural gas prices are expected to continue to improve into 2020, according to Deloitte Canada.
The Good News
Some are suggesting the current oil crisis is severely depressing investments in new oil production, which sets the stage for oil prices hitting $100 or even $150 a barrel over the next five years. A very optimistic outlook. However analysts are basically divided into two camps – the ones predicting high oil prices because of the pandemic and the resulting severe underinvestment in new oilfields, and the ones saying that life in the new normal will mean that demand may never return to pre-COVID-19 levels.
One would need a crystal ball to predict where prices will be in the next 5 years. However, thankfully, the worst of the storm seems to be over.
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