A review of the impact of Covid‐19 corona virus on the oil sector

• Date: 01 May 2020
• Published date: 01 May 2020
• DOI: http://doi.org/10.1111/oet.12773

SURVEY

A review of the impact of Covid-19 corona virus on the oil

sector

Balancing the downturn—how the oil sector, from major

producers to refiners, is facing a temporary dip in

demand of up to about 25 mn bpd (25%) as a result of

virus containment measures, and how it is balancing this

by filling storage and cutting supply, amid low and vola-

tile oil prices.

A large portion of oil demand has been temporarily

erased by measures related to the Covid-19 virus, and

parts of the industry could need life support to ensure

their survival through this period as prices tumble. The

demand reduction must be balanced by lower supply,

and the OPEC/non-OPEC agreement in mid-April tak-

ing 9.7 mn bpd off the market goes some way toward

this. However, it was not enough, and subsequent falls

in the oil price, particularly for WTI as storage fills, are

leading to widespread shut-ins for commercial reasons

or because a buyer simply cannot be found. It is cur-

rently unclear how deep these cuts will be, but another

5 to 10 mn bpd may need to go offline for a month or

two at least to get close to balancing the market; with a

significant portion of this from the North American

onshore.

March and April have been tumultuous months for

the oil markets. Prices have continued to fall, under pres-

sure from falling demand associated with coronavirus

travel restrictions and lockdowns, as well as a surge in

OPEC supply. WTI dropped as low as minus $40/bbl for

May delivery at the close on 20 April, albeit temporarily

for technical reasons,

1

and Brent has fallen to the low

$20/bbl (see Figure 1). This was despite the biggest ever

agreed cut to crude supplies of 9.7 mn bpd, or almost 10%

of the entire market, put in place by OPEC and an

extended group of oil producers on 12 April. The cuts

involve more countries than ever before, and while Mex-

ico had been an early objector, its state company, Pemex,

has since cut on commercial grounds.

Production cuts will have to eventually match or

exceed the demand reductions to bring the market back

into equilibrium, and the subsequent price falls were

judgment that the market did not consider 9.7 mn bpd

nearly enough. US President Trump had called for

15 mn bpd, and OPEC-plus had, in return, called on

other producers to cut by at lea st 5 mn bpd. Meeting

around the same time, G20 energy ministers promised to

work together to stabilize oil prices, but did not make

any specific commitments on production restrictions—

leaving the cuts to market forces, which could take out

well over 5 mn bpd (see non-OPEC-plus supply cut

section below), according to latest (late April) estimates.

The OPEC-plus decision to cut came after a supply

free-for-all in March, in which Saudi Arabia saw an

opportunity to gain market share at the expense of lower

cost producers after Russia failed to go along with cuts to

balance the initial impact of Covid-19. But pressure from

the United States (which still has considerable clout in

Saudi Arabia due to the strong military support it pro-

vides), and the sheer scale of the collapse in demand, per-

suaded the Saudis and Russians back to the table.

But the pullback and attempt to balance the market

were insufficient, even before the issue of compliance.

This is partly due to the earlier supply surge, but mostly

it is the dramatic crash in demand—which, with over a

third of the global population under some form of lock-

down, has fallen more sharply than ever before (see

demand section below). The degree to which crude prices

fall and their duration at low levels will be key in deter-

mining how much additional production gets shut in for

commercial reasons. High-cost, unhedged output will be

first to go, or that without easy access to storage or wider

markets, with the Atlantic Basin likely to be worst

affected.

The split of state-imposed cuts to cuts made on com-

mercial/logistical grounds is not yet clear, but likely to

end up around 60:40. The United States is expected to see

a sharp fall, along with high-cost production in the Cana-

dian tar sands, the North Sea (see non-OPEC supply

section below) and even in countries like India, where

Cairn has said it will cut expenditure and output. Even

some OPEC members will see commercially driven cuts

of this sort. Nigeria, for example, appears to be having

problems selling March and April loadings, leaving mul-

tiple vessels without buyers, making shut-ins inevitable.

Because of high freight rates (due to a ballooning of

floating storage and recent supply surge) and limited

options to market, it is US onshore shale output, along

with light sweet grades in the Atlantic basin that are

DOI: 10.1111/oet.12773

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