By Robert Minter
The Covid-19 pandemic has had a devastating impact on the Oil and Gas sector across the globe and it is not going to get much better anytime soon.
The widespread mandated activity halt of work due to the pandemic has disrupted virtually every industry in such a violent manner that companies within the industries could not react in time. Oil and physical commodities were particularly hard hit due to the long supply chain delivery time and the rapid cessation of mobility. The rapid 20+% plunge in oil demand was longer and of higher magnitude than most oil companies initially estimated.
The return of normalized oil demand is not in the foreseeable future. Current guidelines from the Centers for Disease Control and Prevention (CDC), in the US, make it nearly impossible for workers to return to office buildings before there is a widespread vaccine.
If no one is in the office, there is no need for business travel, and business travel pays the majority of airline flight costs. Currently we see less than 1 million bpd of jet fuel demand, down from 7 million normally. That 6 million bpd hole in demand may return in 2021 at some point but is predicated on medical breakthroughs. British Airways parent company, IAG’s CEO, William Walsh, confirmed this recently stating that it is misguided to consider the travel crisis ‘temporary’.
This does not even account for the reduction in daily travel to work. In the US, 77% of workers drive to work, averaging 30 miles per day. Much of that demand has evaporated with work from home policies expected to last through year end.
US Presidency candidate Joe Biden recently released his $2 Trillion energy plan, largely designed to inspire the democratic base to come out and vote in November, regardless of how realistic the plan turns out to be.
We are as excited about the future of renewables as everyone else, however we temper it with experience. There has been no industry that has, as consistently, underperformed vs guidance as renewables over the last 40 years. Volkswagen, Tesla and others have designed compelling if expensive electric vehicles. Regardless of pricing it will take time to replace the 1.2 billion internal combustion engines currently operating globally.
The implication of a Biden presidency may well be to increase barriers to entry in the US oil and gas exploration market, raising prices. Time will tell, but for now our oil price expectations are for $33-$43 through year end. A widespread increase in lockdowns could pierce the floor of the range. Over the medium term the 10 million bpd of global producer cuts along with currently offline Libyan and Iran production amounts to 13 million bpd of potential supply increases as an overhead dampener on prices.
The writer is Robert Minter, Investment Strategist at ASI on the oil sector