Oil Aboard: How the oil industry will transform post-pandemic

May 9, 2020

2 min read

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What's going on here?

An industry, traditionally perceived to be stable and static to change, has fallen prey to the COVID-19 global pandemic with the oil prices plunging to record low levels.

What does this mean?

The International Energy Agency (IEA) released a report detailing the impact of COVID-19. It remarked that this “once-in-a-century crisis” has taken a severe toll on the global demand levels. The market has been extremely volatile ever since the price war between Russia and Saudi Arabia began in 2017. The cause of this tension can be traced back to an increase in the production levels of the United State’s shale oil which also saw Russia becoming a member of the Saudi-led OPEC. In order to regulate the market price, a self-imposed restriction on output levels was endorsed by the newly formed OPEC+ but was repeatedly ignored by Russian oil companies.

What's the big picture effect?

The West Intermediate Texas (WIT) futures contract, a grade of crude oil used as a benchmark in oil pricing, saw global price levels of oil fall down by 300% to 39$ per barrel. The primary reason for this was due to the low level of transportation taking place across various countries currently under lockdown. With the storage capacities for crude oil about to be maxed out, there are perhaps fewer options available for both large and small petrostates but to reduce the production levels.

A major reason for the plummeting global demand was due to a closure of the Chinese economy which triggered a collapse in demand of around 1.1m barrels per day compared to the 2019 figures. The US, which became the market leader of oil production owing to the boom that it witnessed in shale production, has also suffered significantly due to lower price levels and high operating costs.

An evident change post-pandemic would be an increase in the bankruptcy of smaller, less productive oil companies who cannot survive the current market hostility. Various investors would also be cautious before betting on oil manufacturers despite expectations of a sudden rise in demand and thus, would observe the fault lines in the industry more closely than ever. More and more countries are adopting measures restricting excessive usage of non-renewable energy. Recently, the US government also launched the “Twenty in Ten” initiative which aims at reducing the consumption level of gasoline by 20% over the next decade. This would take its own toll on the future of oil companies adopting measures of increasing their supply capacity. What will be intriguing to see is how oil companies devise a new roadmap laying down the recovery procedure as well as to minimise the uncertainties that plague them.

Report written by Pratyush Chaturvedi

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