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KUALA LUMPUR: This is the year the pendulum in the oil and gas (O&G) industry swung too far into fear and pushed prices into a precipitous free fall as traders were spooked by global glut and a drop in the price. demand caused by the one-year health pandemic.
The steep decline due to the great drama of the oil cartels’ price war and anxiety over the Covid-19 pandemic are rocking markets and economies around the world.
The crisis became apparent between mid-2014 and 2016, when prices had been trending downward as a shift towards a stronger US dollar played a major role in lowering commodity prices by 70 %.
The drop is considered the largest oil price drop in modern history and was one of the three biggest drops since World War II, as well as the longest since the 1986 supply crash.
The Covid-19 spread dragged home prices further this year, resulting in extensive asset write-offs at O&G companies, including Royal Dutch Shell RDSa.L, which has reduced the value of its O&G assets by as much as 22,000. millions of dollars.
The vast majority of gamers have struggled to survive as well, while some have realized that their many planned projects are no longer commercially viable.
IMPACT OF COVID-19
The demand impact led by Covid-19 has caused oil prices to collapse amid tight public health measures that coincide with reduced travel and economic activity.
However, an easing of lockdown measures in the third quarter (Q3) helped improve global demand, but the Organization of the Petroleum Exporting Countries (OPEC) now fears that an increase in Covid-19 cases could derail the Recovery.
Oil is used essentially for transportation, that is, 57 percent of overall demand, and if people work from home and are not traveling for business or tourism, they are not consuming oil.
It will most likely take two years for travel confidence to pick up again, with widespread vaccinations and travel restrictions lifted.
Demand may return to 100 million barrels per day (bpd) as at the beginning of the year, assistant professor of Business and Society at the Asia Business School, Dr. Renato Lima de Oliveira, told Bernama in August.
But, the “new normal” may see more work-from-home arrangements and more online meetings, with fewer business trips.
“So it is possible that what we are seeing today is a permanent shock for the oil industry, reducing its growth potential, traditionally linked to the growth of economic activity,” he said.
At the same time, renewable energies continue to be more competitive with the reduction of costs in generation and electric vehicles increasing their market share.
Together, these factors can result in a very competitive oil market, with lower operating margins.
Industry players have diversified their portfolio with investments in the renewable energy (RE) space and are also aiming to become net zero greenhouse gas emitters by 2050.
Petroliam Nasional Bhd (Petronas) has said it aims to become a net zero emitter of greenhouse gases by 2050 and also plans to increase its investments in renewable energy.
Petronas, the world’s fourth largest exporter of liquefied natural gas, will also intensify its efforts to reduce ‘Scope 1’ and ‘Scope 2’ greenhouse gas emissions, referring to direct emissions from operations and electricity used by the company.
Axi’s chief global market strategist Stephen Innes realizes that the biggest transformation will be a consumer shift towards all things green, but in the meantime, the industry will be very focused on the vaccine.
“The global economy should be in a much better place in 2021. Still, the resurgence of the pandemic will likely keep things choppy in the first quarter of 2021 before vaccine distributions improve prospects for the rest of the year.” he said to Bernama.
However, he said that the imbalances between sectors and countries will persist.
OIL PRICE VOLATILITY
Oil prices in the first half of 2020 were volatile, with Brent crude oil averaging US $ 47.59 (US $ 1 = RM4.08) per barrel now, up from US $ 67.31 per barrel for the last year.
The price reached its highest level at $ 71.75 in January, but fell to $ 15.98 a barrel in April, its lowest level since June 1999.
West Texas Intermediate plunged from more than $ 61 a barrel in January to a record low of $ 37.6 a barrel in April before climbing back to $ 40 in June.
The April price decline came on the heels of the collapse of the OPEC + deal and a record drop in demand related to pandemic-induced lockdowns.
The result was an oversupply combined with limited storage capacity, temporarily making the storage space more valuable than the oil itself.
In an effort to ease storage pressure and balance the market, OPEC + reached an agreement to reduce crude oil production by 9.7 million barrels per day in May and June.
According to data from the US Energy Information Administration, US producers have slowed drilling activity and reduced production, causing the largest drop in crude oil production since 1980.
In May, prices soared almost 90 percent to $ 35 a barrel, a big jump, but still below breakeven for most producers and not enough to bring production back online.
June and July prices were fairly stable at around $ 40 a barrel, as OPEC + agreed to extend production cuts until the end of July.
In August, production cuts began to ease, but uncertainty surrounding Covid-19-induced demand shocks continued, leaving the door open for a return of market instability.
Innes of Axi said that as uncertainty about the outcome of the US elections diminished and (with) the promise of an effective vaccination program against Covid-19 in 2021, the outlook had become clearer.
He said that most of next year should be characterized by above-trend global growth and ultra-flexible monetary policy.
“I still think that oil will have a hard time going back to pre-pandemic mode. While a successful vaccine implementation will break the link between infection and mobility, even then, global demand for oil will only reach its pre-pandemic rate in mid-2022, “he said.
THE INFLUENCE OF THE OIL POSTER
Since 2017, OPEC together with 10 non-OPEC producing countries (OPEC +), the most important of which are Russia, Mexico and Kazakhstan, agreed to production cuts to reduce oil stocks and preserve the stability of the oil market.
In December 2019, participating producers decided to deepen the production cut by 500,000 barrels per day (bpd) to 1.7 million bpd starting in January 2020, subject to the full agreement of participating members.
In November, OPEC lowered its forecasts for global oil demand for the remainder of 2020 and 2021, citing a weaker-than-expected economic outlook and an increase in Covid-19 cases.
As of December 1, more than 63 million cases of Covid-19 were reported worldwide, with 40.5 million recovery cases and 1.47 million deaths.
In a report released ahead of the group’s November 30 and December 1 meeting with non-OPEC allies, OPEC said it expected global oil demand to contract by about 9.8 million. bpd y-o-y (y-o-y) this year, reflecting a downward revision. from 0.3 million barrels from the October assessment.
By 2021, the oil cartel estimated that demand growth would increase by 6.2 million on an annual basis, representing a downward revision of another 0.3 million barrels from its October report.
The group has also steadily lowered its oil demand outlook for next year from an initial expectation of 7.0 million barrels in July.
The energy alliance also agreed to a record supply cut of 9.7 million bpd as of May 1, but later reduced it to 7.7 million bpd in August.
IN OUR OWN BACK YARD
Petronas is reportedly not expected to downsize its workforce at present, despite reported layoffs in the O&G industry globally amid weaker energy prices and demand.
Industry players, including major players like Exxon Mobil Corp and Shell, have eliminated more than 400,000 O&G-related jobs globally to date (YTD).
Petronas has posted a lower net profit for the third consecutive quarter this year due to lower O&G prices due to the Covid-19 pandemic and expects the fourth quarter to remain challenging.
It posted a net loss of RM3.4 billion in the third quarter ended September 30, 2020, compared to a net profit of RM7.4 billion in the same quarter last year, hit by prolonged low prices for the oil and weak demand.
Kenanga Investment Bank firmly believes that Petronas will be increasingly prudent in spending in the future, given the combination of its slightly impaired balance sheet, earnings and higher dividend commitment.
“The continued commitment to higher dividends could hamper the sector’s recovery locally, especially at a time when other major oil companies are cutting dividends globally,” the investment bank said in a note.
Petronas will pay 34 billion ringgit in dividends to the federal government this year.
The group’s capex to date stood at RM22.5 billion, down 22% year-on-year, largely in line with the group’s previous guidance of lower budgeted capex in the financial year than ends December 31, 2020.
Most of the capex was in the upstream sector and in local investments.
Also in particular, gas and new energies are Petronas’ second largest investment area, accounting for 22% of the group’s capex, possibly indicating the group’s recognition of the energy transition trend.Called
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