How the coronavirus pandemic is impacting oil companies
Price declines will lead to a decline in capital expenditure, as loans from banks become more difficult and costly to source
The impact of Covid-19 on energy markets is a global issue that has caused a reduction in demand and the collapse of oil prices. Even without any reduction in output production, all oil companies, both national oil companies (NOCs) and international oil companies (IOCs), have lost 50 per cent of their revenue as the price of crude has fallen by over 60 per cent since the start of the year. This will lead to a reduction in capital expenditure, which is one of the biggest concerns for the long-term recovery of the industry after this crisis.
What we are seeing is that all NOCs and IOCs are slashing capex indiscriminately, and I wouldn’t be surprised to see, by the end of next year, the total spending cut to reach more than $200 billion (Dh734bn). What happens when you start cutting capex today? You are not going to see a reduction of flow anytime soon, but two years from now when you need production after the economic recovery, you are not going to have it.
Operating companies have no choice because they are running out of revenue. When prices drop by 60 per cent, the money that you would use to finance your capex projects is not there. Moreover because of the crisis, banks are being stretched and getting good terms on loans, if you can get a loan at all, will be more difficult.
We really are sailing in uncharted territory at the present with Covid-19.
The best direction for guidance, what we’ve always seen, is that the price of oil is much more sensitive to demand or supply than other commodities. If, for example, demand was higher than supply by 2 per cent, you’d probably see a 10 per cent increase in oil prices.
When you’re talking about cutting total production by 10 per cent, like Opec+ did on April 12, then that’s a 10 per cent cut in revenue, but it could yield more than a 10 per cent increase in the price of crude oil. Overall, it’s actually a win, and you can extend that further – if you cut 30 million barrels per day you could go back to the $50-plus level, gaining all of the 60 per cent loss in prices since January with a 30 per cent cut in production.
Any prediction of the future is probably going to be wrong at this stage. Predicting the coming days and weeks is almost impossible because it is more of a function of psychology and statements by politicians than fundamentals. Things can move in any direction. China’s business is coming back but is currently nowhere close to the levels we saw before the pandemic, and its markets are still depressed from Covid-19.
In the longer term, over the next 6 to 18 months, it is going to be a function of how long Covid-19 is going to stay around. It may stay for a year, but in either case, the economic impact and the reduction in business worldwide will continue until we have a vaccine for the virus. Only at that time will you see a full recovery in demand.
I do not think the economic recovery will revert to normal levels until the end of next year at the earliest. Until that time comes, we will continue to see oil prices at significantly less than $50 a barrel, and shale oil will be crushed in this period down to unprecedented levels. When the recovery does eventually happen, conventional oil will be slow to react, and shale oil will come back with a vengeance. It will take over the lion’s share of the demand increases, and we will go into a hard-inflationary period when the recovery starts.
Hatem Al Mosa is chief executive of Sharjah National Oil Company
Updated: April 21, 2020 09:57 AM