How the COVID-19 outbreak led to the collapse of the oil industry

How the COVID-19 outbreak led to the collapse of the oil industry

For an industry already facing a decline in terms of revenue and declining investor confidence regarding the future of the energy sector, the CoVID-19 pandemic was the last thing that the oil industry needed. The ferocity with which this pandemic has hit the global oil industry is unprecedented in its 35-year history and has brought the entire system on its knees. With nearly 3 billion people on the planet under lockdown imposed by various governments around the globe to prevent the spread of the contagion, the global demand of crude oil and various types of oil products has witnessed unprecedented slump. Transportation and related services have been brought to a grinding halt all around the world resulting in decreased consumption which cannot be mitigated by the oil-producing countries by reducing their production. As of January 2020, the global demand for bent crude was around 100 million barrels per day of which 28.8% was produced by the OPEC countries and the remaining 72.2% being produced by the OPEC+ countries. But since the imposition of this lockdown, global demand has dwindled and as of 15 April 2020, demand has decreased by 29 million barrels per day compared to the same time last year. In the past, the OPEC countries led by Saudi Arabia used to regulate global production so that oil prices remain stable. But a recent fallout with Russia over the slashing of production rates has sparked a production war that has worsened the situation and has led to international oil prices going down a slippery slope. The refusal of Russia to cut down on its shale production has led to Saudi Arabia literally declaring war and increasing its production rate to 12.3 million barrels per day and specifically sending Saudi oil to refineries that use Russian shale at discounted rates. This turmoil has steeply aggravated and accelerated the already worsening situation with oil prices plummeting to historic lows. The price of Brent crude at the beginning of 2020 was $63.38 which as of 23rd March after suffering four straight weeks of price depreciation has lost 60% of its value and is now trading around 20$ per barrel. The crisis is so dire in its nature that 5 million barrels of oil that are being produced are not being able to fetch the cost price of getting the stuff out of the ground. The slump in demand has had such catastrophic effects on oil prices that it has reached single digits in Western Canada and there have recorded incidences of negative pricing for certain grades in North America. There has been heavy investment recently to add capacity to the refining sector and more than 2 million barrels of refining capacity came online in 2019 itself. With dwindling demands, all such capacity addition has resulted in nothing but piling up of more non-beneficial assets. As the lockdown stretches from days into weeks and then into months, plunging oil markets has forced the closure of oil rigs producing more than a million barrels wiping out billions from the market value of the world’s biggest oil companies. However, there is now an additional, even more, the pervasive threat facing many producers, irrespective of their operating costs or strategies. As of 15th April, oil inventories climbed more than 19 million barrels in the last week and although the US government is buying up most of the shale produced by US oil majors, it is still not enough to see off the imminent dangers lurking around the corner. The major oil-producing nations are now calling supertankers to store the oil that is being produced but once the storage facilities are exhausted, the oil has nowhere to go. This imbalance in supply and demand has forced the oil industry to affect tectonic shifts which have had a devastating effect on the supply chain with contractors being laid off and operations on shipping and other freight components being halted. Going by the current trends, it is safe to assume that the situation is unlikely to improve in the short term. It is predicted that demand will pick up in the second half of the year towards the end but all that will depend on whether we have a vaccine and the extent to which we are able to handle this coronavirus menace. Until then, the world remains shut and the fate of the oil industry keeps dangling by a thread.


Anandarup Ghosh

Anandarup Ghosh

I am a 3rd year engineering student at NIFFT, Ranchi with a ardent passion for literary ventures.

Anandarup Ghosh

I am a 3rd year engineering student at NIFFT, Ranchi with a ardent passion for literary ventures.

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