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May-2020

Dual dilemma

There is no shortage of advice arriving daily in this Editor’s inbox about the impact of coronavirus on the global oil industry, on crude prices in particular.

Chris Cunningham
PTQ Editor
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Article Summary
They could fall to $20/bbl, says one source; naphtha based ethylene production is back in favour, says another; and so on.

For its part, the International Energy Agency offers multiple scenarios, as it tends to do, for its analysis of the world picture. In its “pessimistic low case”, the agency’s global forecast is for a fall in daily oil demand by 730 000 barrels through 2020. The IEA’s more optimistic outlook assumes that demand hardly falters, transport is closer to normal, and global demand grows.

Prices rise and fall; margins do the same; the world goes around; but the pandemic develops faster than expert analysis.

The simple argument goes like this: lower oil prices mean higher refining margins, meaning happiness for refiners but less so for producers. A reported instance in China during March saw its independent refiners doubling their margin in a week to a per-tonne $80 as crude dipped to around $35/bbl.

Notwithstanding that, the global oil industry has contrived its own mutation of the crisis, with resulting complex diagnostics. This raises the question of how much permanent damage may be done to the petroleum industry.
OPEC producers led by Saudi Arabia met in early March to cut their output by a little over 2 million b/d, in response to tanking global demand brought about by coronavirus and in an effort to shore up prices. Russia declined to follow suit and prices continued to fall.

The pivotal case in point to illustrate the complexity of this coronavirus- oil price nexus is to be found in the US fracking industry. At the time of writing, the developing impact of the virus on the people of the US was far from clear. The impact on tight oil producers arising from low prices is undoubtedly challenging.

It is fair to say that oil fracking has been the most extraordinary bonanza of recent years. As a result of its super-rapid development in the West Texas Permian and elsewhere, and a relaxing of export rules, the US has become the dominant new force in global oil supplies.

It is also true to say that it is a bonanza with plenty of potential for bust as well as boom. Such is the popularity of light, sweet supplies of crude among refiners and petrochemicals companies, fracking companies have not held back in a headlong rush to supply a seemingly bottomless pool of demand.

The problem is that fracking is an expensive business with relatively low potential for profit-making. Much of it is financed by debt, and when a previous instance of tumbling world prices came around many producers had to seek even more billion-dollar debt.

Right now, demand for oil products is down. Depending on the progress of the pandemic, demand could fall much further. Oil prices remain stubbornly low while Saudi-Russian arm-wrestling continues, too low for producing companies which in many cases struggle to turn a profit from a market level of $50/bbl.

And those debts have to be called in some time.

This short article was the editorial forward in the Q2 issue of PTQ.

You can view the issue HERE

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