In our previous analysis, Covid-19: Repercussions for Oil Markets, Evalueserve predicted that the price war between Saudi Arabia and Russia wasn’t sustainable due to economic ramifications. Henceforth on 12th April 2020, OPEC+ regrouped by agreeing to record production cuts in 2020 to balance the oil markets, which has been further supported by commitment from G20 nations. Despite the agreed production cuts of ~15.0 mmb/d, the rebound in oil prices could predominantly depend on the acceleration of demand growth in 2H2020.
Evalueserve’s analysis suggests that the production cuts are unlikely to prevent inventory builds in the coming months, however it could lead to stock reductions form 2H 2020 onwards. Brent prices are likely to recover to $40/bbl by Q1/Q2 if oil demand returns to pre-crisis levels in 2H 2020. Furthermore, the rise in Brent prices would lag the demand recovery due to excess production and accelerate gradually as stockpiles start to drop. Overall, the demand loss would weigh on oil prices during 2020, but OPEC+ compliance to production cuts, COVID containment by Q2/Q3 2020, and a slow-down in the US production could accelerate the recovery of oil markets during 2021-22.
From our perspective:
- Upstream Investment Cycle: CAPEX will be subdued for next 2-3 years owing to the risk-averse approach by companies. E&P spending for US onshore will be the hardest hit for the next 3 years.
- Fate of Oil Field Services: OFS companies will continue to face significant bankruptcy risk in case the E&P activity continues to slow beyond 2020.
- LNG Demand: Beyond the financial impact, development of future liquefication projects stays at risk due to market volatility, which could deter investors and make It tricky to approve new projects.
- Oil Refiners Under Pressure: Oil refiners will have to make deeper cuts in their refinery runs. However, the run cuts are unlikely to keep pace with plunging fuel margins.
There is no denying that the Covid-19 crisis has tested the agility of global E&P portfolios and business models. However in addition to big oil, Companies with an integrated model, advantaged acreage and balanced portfolio are best placed to survive the crisis.
Read a detailed analysis on Covid-19—Way Forward for Oil Markets. Download the full analysis by clicking the link below.
