Q. How would the Covid-19 pandemic impact the global oil demand this year?
Ans. There has already been widespread demand destruction, given that there are 3 billion people, or nearly 40% of the world’s population, in lockdown. Estimates are that oil demand has fallen by more than 20 million bpd, or about a quarter versus 2019 demand levels. In the short term, this can only get worse, as the pandemic escalates through Europe and the US. How much more demand destruction there will be depends on how long the outbreak is going to last.
Q. What factors will keep oil prices subdued and where do you see oil prices in the near-term and in 2020?
Ans. Apart from the demand destruction wreaked by Covid-19, the spat between OPEC and Russia, over their disagreement to extend production cuts, have also pushed prices to current lows of under $30/bbl. It remains to be seen how this will play out as the Saudis seem adamant in pursuing the strategy of using low prices to squeeze competitors out of the market to gain market share. Their latest announcement that they will export record-high volumes of 10.6 million bpd in May, on the back of producing record-high volumes of 12.3 million bpd for each month of April and May, is testament to that. However, a recent agreement between the US and Russia to have talks might provide some relief. In the short term, I believe prices will stay at current weakened levels of $20-25/bbl, as I do not see the Saudis coming to any agreement soon. However, in the longer term, an agreement will have to be reached as the current situation is lose-lose, even for the Saudis.
Q. Has the drop in global oil prices and the lowering of Official Selling Price by many Middle-East countries resulted in increased oil imports from Asia? could you elaborate on which countries have witnessed a spike in oil imports?
Ans. The increase in supply is expected to occur from April, with some Asian refiners asking to increase their term lifting volumes at the time, due to the discounted prices. However, since then, demand has been devastated across the world, and the same buyers are either re-selling their barrels in the spot market, or declaring force majeure on some of their liftings, notably Indian refiners. IOC, MRPL and HPCL have all cut their refining capacities by up to 30%, and declaring force majeure on some Middle East liftings, while Reliance is re-selling some of their barrels.
Q. Where do you see global crude and product inventories heading? Is significant stockpiling expected?
Ans. Inventories for crude, jet fuel and gasoline particularly are spiraling upwards, as demand collapses. For crude, this can be seen in continued strength in freight as players continue to charter supertankers for storage purposes, with time-charter rates for VLCCs now at $120,000/day, versus $40,000/day at the start of the month. Already inventories of both middle distillates, diesel and jet fuel, as well as light distillates, mainly gasoline, are at multi-month highs – middle distillates stocks are at 13.1 million bbls, highest since Sept 2019, and light distillates at 15.2 million bbls, highest since March 2019, in the Singapore trading hub for the week ended Mar 25. It can only get higher from here, with widespread demand destruction globally.
Q. What kind of impact will the low oil price have on global E&P investments?
Ans. Already we have seen the world’s largest oil companies, cutting down on capex spend, and pulling out of costly projects, not just E&P spend. North American oil and gas producers, for example, have cut capital spending by about 30% on average. BP has said that it will cut capital and operational spending from 2019’s level of $15 billion; Chevron said it will reduce capex from this year’s guidance of $20 billion by trimming spend and lowering output; ExxonMobil will reduce spending from this year’s budget of $30-33 billion; Shell will reduce capex for 2020 by $5 billion; Total will cut capex by more than $3 billion, mostly in exploration, among others.
Q. Can significant reduction be expected in greenhouse gas emissions in 2020?
Ans. Nothing permanent, I’m afraid, though in the short term, the unintended impact of Covid-19 is a reduction in industrial activity, the movement of polluting vehicles. For example, carbon dioxide emissions in China, the world’s largest emitter, fell by about a quarter, or 200 million mt, in throughout February. But activities have slowly resumed as restrictions ease, and with that, bringing back the pollution levels of the past. The rest of the world faced a similar drop in activity and vehicle movement now, but it will all eventually go back to normal, as it inevitably will, as and when the outbreak dissipates.
Q. Demand for which petroleum product is expected to be the worst hit due to the nation-wide lockdowns in place?
Ans. So far jet fuel and gasoline have been the worst hit, with most of the world’s major airlines grounded and most countries in lockdown, minimizing land travel. Asia jet fuel margins have fallen to multiple record-lows, including dipping briefly into the red, averaging at an all-time monthly low of $5.05/bbl; while margins for gasoline in all regions – Asia, Europe and the Americas – have also fallen into multiple record lows, with margins in Asia and Europe mired in negative territory from mid-March, respectively at minus $1.15/bbl and minus 45 cents/bbl; especially with the peak summer driving season in the US and Europe largely curtailed, and talk that traditional even pre-Ramadan travel in Indonesia being banned.