COVID-19 and the Crisis of Black Gold
Saudi Arabia, a land situated in the heart of the middle east, has a rich culture, nurtured by religion, history, and wealth—the latter endowed by vast repertoires of oil fields to its east along the Persian Gulf. Being home to about 18 per cent of the world’s petroleum reserves confers it with the title of the world’s largest exporter of petroleum. The discovery of oil in this land was necessitated by the increasing oil demand during the first world war and post that, the Great Depression, which pushed their economy off its hinges. Now, decades later, history has repeated itself. Saudi’s economy hangs in the balance again, and this time, instead of being its salvation, oil has become the root of their devastation.
It all began in the wake of the COVID-19 pandemic that brought the world to a screeching halt. With economies coming to a standstill, oil market prices plummeted. To curb further losses, the Organization of the Petroleum Exporting Countries (OPEC) held a meeting of all the major oil-producing countries, including those which do not come under its jurisdiction. In the meeting, Saudi Arabia proposed making profound cuts in oil production to support crude prices by reducing an additional 1.5 million barrels a day, raising the net reduction to around 4 per cent of global supply. When Russia, another leading oil producer, expressed apathy to coordinate with the deal, Saudi Arabia took an extreme route by increasing oil production and offering it at steep discounts at around 6 to 8 USD. With a silent oil-price war brewing, other economies that thrive due to their oil industry fell as collateral damage with a decrease in global demand and glut in global oil markets resulting in saturated storage capacities. The situation took a turn for the worse in April as global demand plunged by around 29 million barrels a day.
This infamous period now recognized as ‘Black April’ witnessed the US shale oil companies hitting a negative zone for the first time in history with West Texas Intermediate traded at below minus 39 USD/barrel, falling over by almost 300%. In contrast, Brent Crude declined less rapidly at 25USD/ barrel. This fall was a consequence of the expiring May futures contract that evasive trading companies tried to escape because of a dearth in storage facilities and hesitancy in collecting the supply amidst a massive outbreak. Spot prices were propositioned at massive discounts over futures prices to assuage some of the losses. Yet, the future scenario for the oil companies seemed bleak with the possibility to dispose of the surplus oil and fasten the locks on their production. A point to consider is that the price war concluded with all the countries agreeing to cut back production by 10 million barrels per day(BPD), which would wreak severe havoc on the industries’ capital if they were to shut down their production completely. Consequently, many countries are now on the precipice of a major economic calamity.
The unprecedented level of impact that COVID-19 had on even countries with a robust financial backbone is noteworthy. The overnight breakdown of fuel prices on April 20 could predict the bloodbath coming with people losing their savings and investments through the oil industry overnight. Over the most dramatic twenty minutes in the history of the market, Saudis, Russians, and Texan wildcatters gasped on with horror as the world’s most crucial commodity closed the trading day at a price of minus $37.6. For the petroleum industry, it was a grimly symbolic moment—the fossil fuel that transformed the modern world, known as black gold, was now not an asset but a liability.
The Global Impact
From political instability to fear of widespread poverty, the oil crisis and the subsequent steep fall in prices have swayed economies across the globe from Iraq to Venezuela. Iraq, without a doubt, has been worst-hit by the onset of the crisis. The government seems perplexed over the payouts, unable to pay over four million workers with its revenue solely based on oil exports. UAE and Saudi have spent tens of billions of dollars in their struggle against the brutal price crash. The indefinite work halt has escalated the issue further as the private sector is struggling for cash. Massive job losses occurred in the UAE across several industries. The fiscal deficit of Abu Dhabi is estimated to increase to 7.5% in 2020, from 0.3% in 2019.
Being the weakest economy across South America, Venezuela got perturbed, with the import of essentials being dependent on crude oil sales. Ecuador is facing a similar situation here, tackling the corona crisis while fighting the collapse of its two major oil pipelines. Nigeria has recently recovered from a recession and seems to be plunging into another one with its dependency on oil. It has requested a $7 billion emergency funding and discarded its oil subsidy scheme.
In Russia, coronavirus has swept through oil, gas, and mining sites. What happened with the WTI futures for May is a warning sign of what is to come. Oil producers will face significant difficulties in the future, which will be damaging for Gulf countries as well as Russia. The OPEC+ deal announced earlier this month was supposed to help stabilise prices, but the situation does not look promising. Russia will face massive competition from others as the oversupply will lead them to sell oil to China, one of the major buyers at discounted rates. If the issue doesn’t resolve soon, Russia will face storage issues, which might prove too costly or even risky in terms of oil well stability.
The Impact on India
In these tumultuous circumstances, the excessive supply and destruction of demand have adversely affected the oil industry. India has the opportunity to benefit from this situation being the world’s third-largest consumer of energy as they can purchase oil now at a lower price and release it when the market price is high. Disrupted supply routes and lack of storage infrastructure are the current barriers to this opportunity. Low oil prices can influence the Prime Minister’s plan to reduce imports by 10% by 2022 on the path to energy self-sufficiency reasonably.
In India, while the import bill would go down, companies that produce oil like ONGC will be at a disadvantage in this situation. The consumer is yet to receive benefit from this situation as the taxes on gasoline and diesel have increased. To elevate the demand, giving a slight aid to customers could be a better choice. Post COVID19, the industry won’t be competitive unless we address the supply chain, cost structure that impacts the supply chain, the economy collectively including farmers, MSMEs, and every other financial sub-group. To release packages that can relieve the stress in this situation, the government needs to ramp up its revenue. With oil, being the most significant input cost that this country has to bear, hitting new lows, there lies a massive opportunity that’s not to be missed.
A Hope for Recovery
The lifting of lockdowns around the globe and the ease of restrictions have increased the demand. The US inventories have declined, suggesting supply overhang is clearing. The oil export from OPEC+ countries has decreased significantly, an estimated 6 million barrels per day (BPD). The future lies in the hands of how the government across the US and other countries handle the coronavirus progress. With the lifting barriers, there is a fear of a second wave of the pandemic across the US. If this happens, the oil prices will slump further, and subsequent imposition of lockdown will adversely affect the oil industry. Brent Crude has since more than doubled, with fuel use rising and more signs that the supply glut is being tackled. “Global supply curtailed to a great degree,” said Rystad Energy analyst Paola Rodriguez Masiu. “We are on a clear path to a gradual recovery now.” Keeping in mind the situation amid which we hang, there seems to be a bleak light, a faint ray of hope, a divine faith in recovery, among the dark clouds of uncertainty that hover, based on the castle of efforts the governments put in, to address the issues that pertain at this time when the industry seems to have come at a standstill.
Featured Image Credits: Berri Properties