Oil and Gas Still Suffering from the Coronavirus and Overproduction “One-Two Punch”
April 28, 2020 Welcome
On March 11, 2020, an oil price war was waged on behalf of Saudi Arabia due to the refusal of Russia to reduce oil production. The push for reduced consumption stemmed from the global effect that COVID-19 was having on the economy and demand for oil.
Because of the highly-contagious nature and exponential spread of the Coronavirus, countless businesses were shut down and ordered to work from home if possible. Because of the deleterious effect that the global work-from-home situation has on the demand for oil & gas fuel, prices quickly slid to decades-low levels.
On March 11, 2020, the Word Health Organization (WHO) officially declared COVID-19 a pandemic. This led to the acceleration of federal, regional, and local governments implementing shut-down orders aimed at protecting citizens and communities.
The atmosphere was so dire that Warren Buffet, the legendary investor and business tycoon pointed out that, “The combination actually, of the Coronavirus and what happened with oil… that’s a big one-two punch.” He then compared the current crisis in the Oil market (and global economy) in October 1987.
The Ensuing Positive Feedback Loop
Falling oil demand outpaced any decreases in oil production, and prices continued to plummet. In addition, many oil and gas workers were impacted by the virus itself due to their frequent necessary travel and close quarters. On April 1, 2020, there were 14 offshore workers in the Gulf of Mexico diagnosed with COVID-19. In the five days following, that number almost doubled to 26 workers.
Fewer potentially necessary workers being employed only served to continue the decreased demand and dropping prices.
Fortunately, by April 9, 2020, OPEC, along with several other major oil-producing countries, agreed to production cuts. OPEC would be implementing combined cuts of 10 million bpd (barrels per day), with 4 million bpd of that decrease coming from Saudi Arabia (a member of OPEC). Russia reportedly agreed to cut 2 million bpd of production as part of the deal.
Oil Futures Falling into Negative Territory
Despite production cut agreements, by April 20, 2020, some oil futures fell into negative territory for the first time in history. The culprit was a lack of storage for the current levels of production vs. consumption.
In particular, WTI Crude was trading between $50 and $60 for most of 2019 but dipped as low as negative $37/bbl for May delivery under April 20 contracts.
WTI Crude prices have since improved for June delivery, but are still hovering between $10 and $15/bbl for the time being.
At the time of this writing, there are over 981 thousand cases of COVID-19 in the US with around 55 thousand deaths (according to the CDC). Texas, the largest oil-producing state in the US, accounts for only 663 of those deaths and is dwarfed in comparison to states like New York, New Jersey, and Michigan.
Many US governors are aiming to reopen their regions (at least partially) during the beginning of May. Texas, the largest Gasoline-consuming state in the US (according to 2018 data from the US Energy Information Administration) is set to reopen on May 1, 2020.
On April 27, Governor Greg Abbott announced the strategic approach to opening the state of Texas, including tiered capacity re-openings of local businesses and increased levels of testing to help combat the spread of COVID-19.
With the reopening of businesses and consumer activities, an increase in gasoline and oil demand is to be expected. When your O&G, Air Quality, or Power Generation business needs configured-to-order process equipment, the modular process skid manufacturers at IFS are standing by to improve the efficiency of your production processes.
Contact us today for a quote or more information on how we can support your needs.