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Photo: Bloomberg |
No one can predict exactly what the new normal situation will be in the search for oil, as COVID-19 continues to pressure the industry globally. Demand is likely to remain significantly lower than in 2019, and this situation will continue to be so in the coming years. This will create excess capacity throughout the oil supply chain and keep prices low, writes Julian Lee for Bloomberg.
No one predicts a rapid recovery to the levels of the pre-pandemic oil markets. Several experts, including Royal Dutch Shell Plc Executive Director Ben van Bjorden, have suggested that oil demand may never fully recover.
The Boeing chief executive, for his part, suggests that passenger traffic may not return to 2019 levels in the next three years, further delaying the recovery in fuel demand.
Suppose it will be a loss of oil demand in the future. Let’s say it will be about 5 million barrels per day. That doesn’t sound like much: about 5% of world demand for 2019. The drop in world oil consumption in April peaked at 35 million barrels per day, and projections suggest that by 2020 oil will be Lee writes: about 10 million barrels per day (or 10%) less than in 2019.
Of course, many of us will return to our pre-viral lifestyle as quickly as possible, but others will gladly abandon their daily commute to work from home, and employers may be happy to fulfill their wish. After months of video conferencing, Those business trips that filled high-flying passenger aircraft may also be subject to increased scrutiny. The changes can increase electricity consumption while reducing fuel demand.
The global pandemic is very different from the financial crisis. It affects our physical well-being as well as our financial health and compels everyone, to one degree or another, to adopt new ways of living and working, whether we like it or not.
The industry may experience a 5% decrease in demand in the long term, but it will be much more difficult to prosper in such an environment.
Such loss would lead to structural overcapacity. There will be too many drilling to get oil out of the ground, too many ships to transport it, too many refineries to process it.
Even before the pandemic, we saw a world where the growth in oil demand was increasingly focused on plastics, not fuels. The prolonged decline in demand will only increase competition against refineries in the Middle East versus Europe and the US. As more facilities search for markets for their surplus products, the U.S.
At the same time, the oil fields are gradually depleting as they come online, forcing companies to look elsewhere. Nowhere is this more evident than the environment in which the US oil industry operates. USA
The second oil shale boom was helped by several years of steady growth in global oil demand. All the major producers pumped a lot of oil, stabilizing prices at around $ 50 per barrel.
But it got to the point where OPEC decided to start cutting production by more than 20%, and non-state cartels also reported a decrease of this magnitude.
Many wells that are not depleted will remain idle indefinitely, pending more favorable market conditions. This serious excess of additional production capacity will lead to an effective price restriction, as observed in the 1990s.
Neither the mining regulation led by opique by Riyadh OPEC, nor Donald Trump’s attacks against other oil producers will be able to eliminate this reserve capacity. And it is likely that after the current crisis, Saudi Arabia will be less inclined to increase yields, which will slow down again as other manufacturers continue to develop the tap.
When oil prices rise, producers rush to use their reserve capacity, undermining the recovery. Since the drop in oil prices since the mid-1980s, it has taken two decades to recover to its previous levels. The process could be even longer this time, Lee concludes.
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