How Covid-19 is pushing down global prices of oil

 

Two months ago in this column, I analysed potential impacts of the Coronavirus disease on global oil

By GEORGE WACHIRA
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Summary

• Brent Oil prices dropped from $65, then to $55, and recently to $28, with the total global oil demand estimated to have declined by as much as 20 percent.
• Indeed, the IMF last week advised that the global economy is already in recession.

demand and prices. At the time, the total global coronavirus cases were
about 17,000 and 300 deaths, with China as the hotspot. Today global cases are over 650,000 with about 30,000 deaths spread across all continents, with the highest concentration now in Europe and North America.

At the time it was China’s imports and exports that were under threat with the rest of the world apprehensively watching. Brent Oil prices dropped from $65, then to $55, and recently to $28, with the total global oil demand estimated to have declined by as much as 20 percent. Indeed, the IMF last week advised that the global economy is already in recession.

Then early last month, an oil price war emerged between Saudi Arabia and Russia with the Saudis threatening to increase production and slash prices, and the Russians literally daring them to proceed. This accelerated oil price decline in a global economy already devastated by the impact of the virus. And this is the global oil supply/price predicament we expect to remain in unless a political/diplomatic solution to over-production is found.

It is the USA shale oil producers who are the incremental global oil producers, and at prices below $30 they are already heading for bankruptcies. It was expected that diplomatic persuasion by the US on Saudis to abandon over-production would work, but this has not happened, with a US executive or legislative action against Saudi oil exports into the USA seen as likelihood.

Whatever action is taken by the US or the other oil producers to voluntarily or otherwise reduce oil production will most likely have limited impact on prices. This is because of the pressure being exerted on oil demands and prices by the ongoing worldwide economic erosion as a result of the virus. China is just starting to stabilise the virus infections, while the USA is where China was two months ago, and Europe is heading for the infection peak.

As China recovers from the virus and the economy is headed for improvement, massive buying and stocking by the Chinese of the cheap sub-$30 oil is going on. The same is happening with major oil traders who are taking advantage of the low prices to stock-pile cheap oil in floating storage (tankers).

Otherwise the rest of the world is currently pre-occupied with the immediate emergency, which is economic survival in a Covid-19 regime. They are too busy and focused on the virus to pay much attention to oil prices. However, the less endowed oil producers are helplessly worried about the impact of low oil prices and revenues on their national budgets.

With respect of Kenya, the economy is taking a heavy hit from the virus with most of the energy/oil consuming sectors already significantly impacted by the restrictions imposed to limit the virus spread. Indications are that petroleum sales and demand dropped by as much as 30 per cent in the past week, with further drops expected in the weeks and months ahead. Energy/oil consumption is a critical indicator of economic performance. However, it is attention to public safety that is currently paramount, for healthy humans can always reboot the economy.

And when we are at it, I am impressed by how well the authorities have stayed ahead of the virus. What I am not sure of is the sufficiency of capacity and preparedness for the worst case scenario, which for me is the possibility of a virus contagion in one of our key informal settlements (slums).

I hope someone is doing a worst case scenario analysis and planning which looks at capacity – isolation facilities, medical personnel, equipment, and ambulances assuming that the existing facilities are already (as always ) overstretched. Specifically, construction engineers and designers should be thinking of a large isolation facility that can be constructed at short notice. We may never need it, but readiness to launch one if required is important.

Kenya should assume that no foreign country will have the time or energy to respond to requests for Covid-19 support as each country is virtually pre-occupied with the virus.

George Wachira

Director, Petroleum Focus Consultants; wachira@petroleumfocus.com