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The oil industry has just endured one of the most difficult months in its history.
It is difficult to imagine an immediate recovery. Oil executives are justly cautious. But look beyond the moor and there are some signs that the oil market is recovering, if not entirely, at least stabilizing.
Oil demand plunged by about a third in April as coronavirus-related blockades and travel bans were blocked. Unwanted barrels were introduced into every available nook and cranny, from river barges to salt caverns, when a 100-meter daily barrel market began to creak at the seams.
Oil prices did not drop as much as they imploded. The US benchmark turned briefly negative when a lack of available storage forced traders to pay rivals to take the crude out of their hands.
Retail investors from Florida to Shanghai, betting on the eventual recovery of oil, were among the immediate victims. But the impact reverberated across the energy sector in job losses and project cancellations.
The alarming view of negative prices in the United States forced a rapid calculation for oil producers. Those who hoped to wait for their rivals, believing they would blink first and speed up production, had no choice but to respond. The number of oil drilling rigs worldwide has decreased by a quarter since February, according to Baker Hughes.
For those producers, the idea of paying customers to take away merchandise, in which they had invested billions of dollars to find and extract, quickly focused their minds.
The taps were tightened, in some cases overnight. High-cost production in the US USA And Canada is now falling faster than many had dared to predict, and could decline by 3 million b / d by the end of May.
The cuts agreed in mid-April by OPEC and its allies like Russia are now beginning to come true. Other countries like Norway, the largest oil producer in Western Europe, have demanded cuts in production from June. Producers around the world may not close the fields entirely, but few now seek to maximize production.
As supplies shrink, the worst of the collapse in demand is likely to have passed.
Blockades, at least in developed and large oil-consuming economies such as the United States and Germany, appear to be on a downward slope. Oil demand will not drop overnight, but if it has dropped “only” 20m b / d in June instead of the 30m or so forecast in April, the rapid build-up of unwanted reserves should slow, while the world is producing significantly less oil.
Some large traders, including Trafigura and Mercuria, even think that the market could slip into a small deficit this summer, although it will take a long time to reduce large inventories excessively.
After weeks of violent price changes, Brent crude has stabilized near $ 26 a barrel. The US benchmark. The US, West Texas Intermediate, has returned to about $ 20.
Nor is it the sign of a healthy industry. Crude has continued to drop about 65 percent since January. But the indentation has decreased.
Goldman Sachs predicts that Brent could return to $ 65 a barrel by the fourth quarter of next year, as supply adjusts and demand recovers.
But a recovery is based on the magnitude of the disaster being large enough to force painful and lasting changes. A possible second wave of the pandemic could trigger a repeat.
The crisis has also raised specific questions about the future of an industry that already faces the threat of peak demand in the next decade or so.
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Air travel, which the industry was waiting for for much of the expansion in oil demand, now appears vulnerable. Analysts now weigh the positive effects of rising incomes in emerging economies against a greater reluctance to travel.
Some in the oil sector see hope in petrochemicals, if the reaction against plastics and food packaging weakens after the pandemic. However, this feels optimistic given the increase in biodegradable alternatives already on the market.
Royal Dutch Shell CEO Ben van Beurden admitted last week that he questions whether oil demand can return to pre-crisis levels. His response was not just to cut production, but also to “reset” the company’s dividend, a decision made with an eye to an uncertain future.
This could be too pessimistic, or perhaps optimistic, for most people more concerned with the health of the environment than the future of the oil industry. But it also shows a sector that is still under the control of a crisis that extends far beyond the immediate horizon.
