|Image: Reuters|The Pandemic has disrupted economies worldwide, and oil is not escaping unscathed. While fluctuations in oil prices are not new, the latest tailspin sent oil companies and investors in a state of alarm. What does this mean for arguably the most important commodity in the world? The Wholistic View illustrates (4 Min Read).
Market forces such as Demand and Supply usually determine the price of commodities but the same cannot be said for oil. The dynamics behind oil prices are often complex, with environmental and geopolitical factors at play. At the start of 2020, demand for oil around the world plunged but oil-producing countries continued to generate the commodity at a surplus. At one point, the price for a barrel of West Texas Intermediate, the benchmark for US oil, fell to a negative -$37.63 a barrel which meant that oil producers were paying buyers to offload the commodity.
For years, global oil production has been increasing steadily fuelled by demand from a growing global economy. That was before the oil industry was hit by a double whammy: The Coronavirus pandemic and a spat between two major oil producers, Saudia Arabia and Russia. Saudi Arabia is a part of OPEC or the Organisation of the Petroleum Exporting Countries which is currently made up of 13 members from the Middle East, Africa and South America. While the oil cartel controls around 80% of total oil reserves, it only contributed around 30% of global oil production. With demand for oil falling to unprecedented levels in March 2020, Saudia Arabia proposed a downward adjustment in oil production to a wider group called OPEC+, which included Russia.
|Image: Reuters|The wider alliance of OPEC+ has been regulating production in order to balance the oil market since 2017. However, Saudi Arabia's proposal to cut production levels was opposed by Russia which analysts described as a geopolitical move against the United States. In 2018, the U.S. eclipsed Saudi Arabia as of the number 1 oil producer in the world. With oil prices in free-fall, it would be hard for American producers to break even, which would threaten its market dominance.
With Russia unwilling to budge, Saudia Arabia retaliated by slashing prices and increasing production causing a wave of repercussions to reverberate through the whole larger economy. Russia followed suit by lowering prices. Crude oil prices have been see-sawing since then falling more than 60% since the beginning of 2020. A few weeks after the spat between Russia and Saudi Arabia, OPEC and its allies eventually agreed to a historic cut in oil production levels to shore up prices. However, the world was already knee-deep in the pandemic by the time the deal was reached in April of 2020, dampening the effects of the production cuts.
|Image: Los Angeles Times|With international travel and trade ravaged by the pandemic, Aeroplanes were grounded and lockdowns were enforced, constraining the demand for fuel. For the first time in over a decade, global oil demand is expected to fall in 2020. The Initial contraction in China's economy was also a major trigger for the volatile oil prices. China, which made up 24% of energy demand in 2019, was one of the earliest countries to impose a nationwide lockdown in January 2020. The shuttering of businesses and factories had a lasting impact on the local and global economy for the first quarter of the year. The Subsequent lockdowns around the world, including in Europe and the United States, further depressed the energy demand.with an oil glut and demand collapsing, storage space for crude for all the excess crude was quickly filling up.
In April, the unimaginable happened when U.S. oil price went into negative territory for the first time which meant sellers were paying buyers to offload oil. The Projected Revenue for oil and gas companies involved in exploration and production is expected to decline 40% year-on-year, from $2.47 trillion in revenues in 2019 to $1.47 trillion this year. The Rise of Renewable energy in recent years is also threatening the pole position of fossil fuels. In 2018, the share of renewables in electricity production increased to nearly 26%.In the first quarter of 2020, the usage of renewables globally increased by 1.5% compared to the same period in 2019. According to the International Energy Agency, renewables are the most resilient energy source during the coronavirus pandemic with renewable electricity generation projected to rise by almost 5% in 2020.
As governments worldwide ease social restrictions, the way people travel has changed. Even before the pandemic, the global oil demand was expected to slow down after 2025 and flatten out in the 2030s. While oil prices have rebounded slightly, it is likely that the oil industry will have to adjust to a new normal in the years ahead.
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