Oil price falls further as demand collapses

Oil price falls demand collapses saudi arabia russia coronavirus covid19
Global oil demand has been hit hard by widespread shutdowns and other efforts to stop the spread of coronavirus.

The price of oil has continued to tumble this week as increased efforts to tackle the spread of coronavirus line the market up for a record-breaking annual drop in demand.

Meanwhile, warnings have been circulating that oil prices could plummet below US$10 per barrel for the first time in more than 20 years.

Adding to this is a recently developing price war between Saudi Arabia and Russia as investors anticipate a spate of capital expenditure cuts.

Global demand crushed by restrictions and shutdowns

Global oil demand has been hit hard by the COVID-19 pandemic and the widespread shutdown of China’s economy, resulting in declines not seen since 2011.

According to the International Energy Agency, demand is expected to fall by 435,000 barrels per day in the 2020 first quarter, compared to the same period in 2019.

For the 2020 full year, the IEA has downgraded its global growth forecast by 365,000bpd to 825,000bpd.

The outbreak has also led to the IEA’s revised outlook for global refinery runs. Chinese crude throughputs for the first quarter have been cut by 1.1 million bpd and are now expected to reduce by 500,000bpd year-on-year.

IEA executive director Dr Fatih Birol said the coronavirus crisis was affecting a wide range of energy markets, including coal, gas and renewables, but its impact on oil markets is “particularly severe”.

“It is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels,” he said.

Oil and gas stocks continue to fall

After a tumultuous week, the Australian stock market made a strong comeback on Friday, paring back losses of more than 8% to finish up 4.4% on the closing bell.

However, this was quickly reversed with the ASX 200 sinking 9.7% on Monday to 5,002 points.

Oil and gas stocks led the losses last week as persistent coronavirus fears impacted oil prices, which were made worse by OPEC’s failure to reach an output deal with its allies, sparking a price war between Russia and Saudi Arabia.

Adding to this, the coronavirus outbreak has cut demand for fuel as manufacturing, shipping and travel has reduced, and falling oil prices have also impacted energy transport and services companies.

Oil’s falling price has hurt international oil supermajors such as ExxonMobil (NYSE: XOM) and Royal Dutch Shell (LON: RSDA), which respectively lost 5% and 3% of their share value last week.

On Monday, ASX oil and gas majors including Woodside Petroleum (ASX: WPL), Santos (ASX: STO) and Oil Search (ASX: OSH) extended last week’s losses by 14% or more.

Oil price predictions

According to reports, Goldman Sachs had forecast oil prices of around US$45/bbl next month, although analysts have speculated this will likely be revised further downward given Brent crude’s current price of $31.41/bbl.

Whereas UK-based FACTS Global Energy told clients that Brent crude prices around US$20/bbl are “already looking almost certain”.

Oil price 10 year chart coronavirus WTI Brent crude

It added that prices below US$10/bbl are also “pretty inevitable in the coming months unless there are signs of an end to the current stand-off between Saudi Arabia and Russia”.

LNG investments could suffer

The plummeting oil price could also make it more difficult for new liquefied natural gas (LNG) projects to go ahead.

According to EnergyQuest’s Australian LNG Monthly report for February, released on Monday, the impact of the oil price crash won’t be felt immediately in the Australian LNG market due to the effect of the lagged oil price on which LNG prices are indexed.

However, it could mean bad news for projects such as Woodside’s Scarborough LNG project in Western Australia and Santos’ Barossa offshore gas project off the Northern Territory, which are due for final investment decisions this year.

“The oil price dive is expected to be felt across LNG markets as it makes oil-based LNG cargoes 25-30% cheaper,” the report stated.

“Roughly 70-75% of the LNG market is still under long-term contracts and exporters with a high dependence on oil-linked contracts will see revenue impacted by the lower oil prices,” EnergyQuest added.

Capex cuts

It has been reported that North American producers will cut back spending by about US$8.3 billion.

Saudi Arabian oil giant Saudi Aramco has also slashed its 2020 planned capex by a quarter, according to Bernstein Research, after announcing a 20% drop in profits in 2019 to US$88.2 billion.

While Australian producers haven’t announced capex cuts so far, both Woodside and Santos are reportedly reviewing capex activities and are considering the implications of the collapsed prices.

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