DESPITE all the efforts, the overall crude prognosis continues to stay gloomy. The industry is taking big hits, with no respite in sight.
Forty publicly traded US oil producers wrote down a collective $48 billion worth of the value of their assets in first quarter of 2020, the US Energy Information Administration (EIA) reported last Monday.
Quoting a recent study from Deloitte, Oilprice.com pointed out that the collapse in (crude oil) prices, the economic slowdown, and the crash in demand in Q2 could prompt (US) shale drillers in aggregate to impair or write-down the value of their assets by as much as $300bn, with significant impairments expected in the second quarter of 2020. Debts for some companies could become unsustainable, leading to a chain reaction of insolvencies and consolidation in the industry, Deloitte said.
Oil giant Shell cut its dividend for the first time since World War II in the first quarter of 2020.
The company reported adjusted earnings of $638 million for the second quarter of 2020. That compared with net profit of $3.5bn over the same period a year earlier and $2.9bn in the first three months of 2020. Norway’s Equinor slashed its quarterly dividend to shareholders by two-thirds.
Shell and BP have since announced second-quarter write-downs of up to $22bn and $17.5bn, respectively. Interestingly, the assumptions were not just based on the bloodbath the markets experienced on April 20. Rather, these were based on expectations of lower oil and gas prices over the next 30 years.
While lowering its expectations of oil and gas prices over the long-term, Spanish oil and gas firm Repsol also reported a net loss for the second quarter, announcing write-downs of $1.5bn in assets.
“My big takeaway is that this is not just the result of the (corona) virus: These are long-term, decade-old trends,” Kathy Hipple, analyst at the Institute for Energy Economics and Financial Analysis (IEEFA), told CNBC via telephone. The oil industry “is not going away tomorrow, but it is a long-term decline that we are seeing.”
“The game is up: Oil and gas companies can no longer mask their financial frailty,” Nikki Reisch, Director of the Center for International Environmental Law’s Climate & Energy Programme was quoted as saying.
Major oil producers are in no different state. Saudi Arabia, the world’s largest crude exporter, posted a budgetary deficit of $29.12bn for the second quarter of this year, Saudi Ministry of Finance reported. As per the report, second-quarter oil revenues fell by 45pc year-on-year to $25.5bn, while revenues dropped 49pc to nearly $36bn.
While the Organisation of the Petroleum Exporting Countries and its allies — known as the Opec+ — are opening taps from August, markets are emitting negative signals about the move. Markets could face glut, analysts are saying. Our balances suggest that tapering plans of Opec+ to year-end may need to be put on hold if the goal is to sustain the (current) oil price recovery, Rystad Energy said in a recent analysis of the markets. The upcoming partial return of curtailed Opec+ oil production from August is set to create a new four-month supply glut of around 170 million barrels, the report underlined.
The pandemic impact is not going to wither away, any time soon. A slow recovery in jet fuel demand will drag on global oil demand for at least another two years as overall passenger traffic numbers continue to be low and mandatory quarantines continue to stop people from traveling on international flights.
A full recovery in jet fuel demand will probably have to wait until 2023, Bank of America said in a recent commodities research report cited by The National.
Consequent to all this, Tsvetana Paraskova writing for Oilprice.com believes Opec is trying to come to terms with the idea that the coronavirus crisis may have brought with it, permanent changes in consumer behavior, stifling oil demand over the next two decades in stark contrast to the demand that the cartel had expected just a year ago.
Some officials at Opec are admitting the possibility — unthinkable until just six months ago — that global oil demand may not recover to the pre-pandemic levels ever, Reuters reported.
Whether the Covid-19 crisis has significantly accelerated the timeline of peak oil demand or if we are already past that peak remains a key concern for the Opec, sources told Reuters. Other industry leaders, including the CEOs’ of Shell and the BP, are also admitting that oil demand might have already peaked. A rude crude awakening for many indeed.
Published in Dawn, August 1st, 2020