Oil Crisis: How & Why Did The OPEC Nations Suffer During The Pandemic
By Trina Chatterjee
The oil and gas industry is expanding speedily and is not only fueling a country’s enormous economy, alluring investors and oil producers from near and far but it is also serving as a focal point for some leading joint projects being undertaken by OPEC’s Member Countries, who recognize unparalleled growth potential taking place in many countries.
But with the world locked down due to the coronavirus, global oil record is seeing its most intense plunge on record. Oil-producing countries and companies, which have had to make big compromises to address the impact of the health crisis, are hoping that the darkest days are now behind them but the prospect of a second wave of coronavirus looms large, jeopardizing any attempt at a positive and encouraging outlook.
EFFECTS ON THE OIL SECTOR DUE TO THE CORONAVIRUS LOCKDOWN:
The impact which the lockdown will have on jobs, companies, banks and local economies was one of the major reasons that pushed world leaders to come together and join forces and cut production in an orderly way. But due to the degree of the adversity which has diminished the efforts of the industries, it has resulted in prices diving below at a spiking rate. It’s the most frightful nightmare for manufacturers and refiners.
The countries in Middle East and Africa which are oil dependent economies have an uncertain future in hand. They are facing a challenging time as there is significantly less activity taking place and the demand for oil and gas has fallen strikingly low. The economies which are slowly emerging and have the potential to become a leading oil producer are also having their projects hampered. A lot of pre- construction projects are under the radar of further inspection because there are growing hesitancies about their feasibility in the current economic background.
Oil prices around the world have decreased by half since the start of 2020, which are hitting record lows till now. Producers have cut output on a historic scale after the price crash which include forecasted reductions by the OPEC alliance or the OPEC+ agreement which state that, many of the world’s prime oil producers have come together and agreed to extend the oil production cuts that have helped in holding up their prices since the collapse of oil prices in the depths of the coronavirus pandemic back in April. Oil ministers from the Organization of the Petroleum Exporting Countries have reached an agreement to continue clipping 9.7 million barrels a day in normal times through July.
Now, demand is starting to slide higher as governments ease lockdowns in the coming days. In addition, the supply chain is facing innumerable roadblocks too due to the discontinuation of global trade. Project development and their maintenance are facing extreme delays and cancellation.
There is a rapid drop in the number of oil rigs in functioning within the oil industry of the United States, which had fallen to a four year low, last week. Oil companies were running about 650 rigs in the US before the country got hit with the pandemic. As of now, more than 40 percent of them had stopped working. As a result, the sector has seen a disproportion of oversupply and reduced demand, further aggravating the price crash. This has spilled downwards and has impacted a number of sectors that normally pull the FDI attention into focus, like the chemical, plastic and automotive sectors.
SIGNS OF RECOVERY:
Once the coronavirus scare is over and the global risk situation eases, demand for oil should be back. In the near term, companies like Castrol, tyre companies like MRF who use crude oil derivatives should benefit from this short term solution. However, with the potential for a resurgence of Covid-19 a question mark is looming on any future outlook but for now, the signs of recovery are continuing to emerge. The decline in global gas and oil prices has resulted in a decrease in domestic gas prices, leading to soaring competitive advantage over liquid automotive fuels, which haven’t witnessed a material fall in prices due to excise duty hikes. The domestic gas allocation for the complete demand of CNG and lower domestic gas prices are continuing to boost demand growth in the city gas distribution sector.
Oil production is reacting in a huge way to market forces, and economic activity is undertaking a gradual recovery. But major risks are still remaining in question. A crucial question lies forward that whether governments can ease the lockdown measures without stimulating a resurgence of Covid-19 outbreaks. Another is if the oil producing countries within the OPEC council will maintain a high level of obedience with the OPEC+ agreement or not.
It is essential for us to develop a secure strategy for our energy needs. The longer it takes for us and our governments to take the necessary steps for its implementation, the more dangerous and uncertain our futures seem to be. To prevent enduring damage to oil industries, countries might seek to pursue other measures like freeing up storage capacity and buying oil from other oil producers. In the current scenario, it is acceptable to assume that the oil crisis will ultimately be solved by a shoot in global oil demand, once lockdowns are lifted and the oil industry can go back to functioning normally in full rigor again. Until then, we have to manage and sustain our oil reserves with short term solutions.