Consultant Rystad Energy and Wood Mackenzie have warned of a sustained drop in oil demand and exploration spending if the coronavirus outbreak is not contained quickly.
Consultant Rystad Energy and Wood Mackenzie have warned of a sustained drop in oil demand and exploration spending if the coronavirus outbreak is not contained quickly.
Rystad Energy now expects more than half of global oil demand growth to be lost in 2020 as a result of the coronavirus. February’s global crude demand dropped by 4.6 million barrels per day (bpd), led by a 2.9 million bpd month-on-month drop in Chinese crude, it said.
Rystad Energy’s pre-coronavirus global oil growth estimate was 1.1 million bpd for 2020. Its data now point to growth likely to fall to 500,000 bpd, and this is assuming that the Covid-19 epidemic will largely be contained by the end of June, which in turn implies a further downside risk.
At least 2 million bpd of supply needs to be removed from second quarter balances in order to see a stabilization in oil prices, if Libya’s shut-in 1.1 million bpd production comes back online. The supply overhang from the first quarter will also have to be worked down before there can be a recovery in price, said Rystad.
Rystad said that it expects production cuts to be increased by 0.6 million bpd in the second quarter. However, it expects the stock of liquids building up to be 1.3 million bpd and crude at 1.5 million bpd. Brent would see continued downwards pressure to below $50 a barrel.
If Opec agrees to extending production cuts above 1 million bpd in the next quarter, large stock builds are still inevitable, Rystad added. It sees supply continuing to surge in countries that are not bound by any production quotas – namely in the US, Brazil, Norway, and Guyana.
Crude oil prices below $40 per barrel for an extended period could set off the dramatic cost-cutting and cancellation of many exploration projects, warned consultant Wood Mackenzie.
‘The price collapse could be the trigger for a new phase of deep industry restructuring – one that rivals the changes seen in the late-1990s,’ said Tom Ellacott, vice president at WoodMackenzie.
Wood Mackenzie also estimates that, at current activity levels, many companies require an average Brent crude oil price of $53 per barrel to break even this year.
Fraser McKay, Wood Mackenzie’s upstream analysis head, said that up to $380 billion of cash flow would vanish from forecasts with an average Brent price of $35 per barrel for the remainder of 2020. ‘Sustained prices below $40 per barrel would trigger a new wave of brutal cost-cutting,’ he said. ‘Discretionary spend would be slashed, including buybacks and exploration. But given the lack of excess in the system, the cuts to development activity will be necessarily fast and brutal. US tight oil development activity, though not as flexible as many believe, will react immediately.’
Under the $35 average price scenario, companies will also delay unsanctioned conventional projects and scale back in-fill, maintenance and other spend categories, McKay added.
Ellacot said: ‘More highly leveraged players will be forced to make the deepest cuts to stave off bankruptcy. There is much less obvious excess spend to cut this time around after five years of disciplined investment and austerity. Raising capital is also much harder now, especially for US independents, and upstream merger and acquisition market activity is at record lows. In addition, many companies have already made the most of the obvious asset sales.’
