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Oil sector faces unprecedented challenge

Billions of people under quarantine and a global shutdown of business operations is devastating company finances

The Covid-19 outbreak seemed little more than another temporary shock to long-term rangebound energy markets barely a month ago. China appeared to have contained a largely localised phenomenon, and observers were estimating how long it would take Asian demand to recover. Oil producers stuck firmly to their 2020 production guidance. 

But events have radically changed. Europe is now the epicentre of a global emergency that could last months and test the healthcare capabilities of governments throughout the world.

The associated collapse in global energy demand—and uncertainty how and when supply will respond in the wake of Opec+ disarray—have shocked commodity markets. “The weak global economy was not ready for Covid-19, which is why we are seeing escalated panic in the markets,” says Louise Dickson, an analyst at consultancy Rystad Energy. “And unlike structural economic collapses, we do not know when the corona effect will ease up—markets could be wrestling with the virus well into 2021 in a worst-case scenario.”

Financial fallout

Measures to confine the Covid-19 outbreak are wreaking havoc on the global economy. Price reporting agency S&P Global Platts estimates that lockdown in China caused GDP to contract by 13pc in the first quarter. The closure of businesses and public spaces across the US and Europe will reduce both economies by at least 12pc in the second quarter expects Platts.

“What we are seeing here is essentially the atomic bomb equivalent in the oil markets” Dickson, Rystad

The IMF adds that emerging markets, particularly in oil-dependent regions like the Middle East and Central Asia, are suffering from the economic effects. $83bn in investment has evaporated from emerging markets since the start of the Covid-19 emergency, the largest ever cash outflow recorded. Nearly 80 countries have approached the IMF pleading for further financial support. Managing director Kristalina Georgieva pledges to deploy the fund’s full $1tn lending capacity if necessary.

And oil producers globally are preparing for the worst. Financial budgets have been radically downsized after the price shock sent share price value plummeting. Exploration expenses have been cut back and only the most crucial projects are getting the green light.

Companies have flagged widescale potential for bankruptcy. Irish independent Tullow said it may not be possible to continue operating this year unless economic conditions improve. US independent Whiting Petroleum became in early April the first recognisable name in the Covid-19 era to file for bankruptcy protection.

Similarly, unemployment could sweep the oilfield services industry if the downturn persists and crude continues to slump below $40/bl for the remainder of the year. “What we are seeing here is essentially the atomic bomb equivalent in the oil markets,” says Dickson.

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