Oil industry revival remains hostage to Covid-19 pandemic

For the oil industry, April was certainly the lowest point in recent years as the sector experienced a major collapse of oil demands. This has caused unplanned oil production cut-backs as storage tanks filled up, prompting a steep drop of Brent crude oil prices to below $30 per barrel, levels last seen in late 1990s. Oil demands and prices can only revive when ample progress is made across the world to contain Coronavirus pandemic which prompted socio-economic shutdowns worldwide.

As the May Day dawned last week many countries were planning or implementing gradual and cautious roll-backs of virus-related restrictions, as early signs of virus abatement become apparent. The timing and quantum of oil demand and price recovery will therefore remain work in progress until economic activities sufficiently come back, determined of course by successes in virus containment.

Specifically, it is when international air travel resumes that oil demands will start registering noticeable recovery as this will denote return of global trade (imports, exports), tourism and business travel. Aviation fuels constitute a major fraction of petroleum demand slate. Similarly, demands for road transport fuels, and industrial fuel oils are expected to come back.

In the meantime, it will be the survival of the fittest among oil producing countries and companies as they experience reduced oil export demands and revenues. For those countries whose GDPs are heavily weighted on oil exports, financing national budgets will be a major nightmare. Oil companies are already cutting back their capex, operating costs, and dividends for survival, with the lower-tier operators finding it difficult to keep afloat.

The OPEC (plus allies) agreement to cut oil production by 10percent effective this month will have limited impact as the total global over-supply is estimated to be about 30percent. There is however plenty of “involuntary” production shut-ins mainly by the US shale oil producers whose production at current prices has become unsustainable. US cannot discuss with other nations plans to control oil production or prices due to Antitrust laws which go back to 1960s

And a diplomatic crisis is brewing between US and Saudi Arabia. This month, 43 Saudi Arabian crude oil tankers loaded in March and April are queuing to discharge oil in US facilities, at a time when USA has no ullage for their own production, and when US producers are shutting down production.

It is expected that President Trump will play his executive “trump card” to protect US oil interests by either imposing hefty tariffs on Saudi oil, or simply threatening the Saudis with military support withdrawal if they fail to divert their tankers. It will be interesting to watch how this episode plays out.

Back to Covid-19 which holds key to global economic performance in the immediate future. The ultimate solution remains discovery of effective vaccines whose application will permit unrestricted human activities to sustain economic recovery.

And indeed scientists and laboratories across the world are working 7/24 to deliver vaccines, the only question being how many months it will take to avail affordable vaccines to all countries. It is also encouraging that various forms of Covid-19 therapeutic treatments are undergoing clinical trials with promising results.

Until vaccines are in place, it remains a “cat-and-mouse” game between humans and the virus, and how smartly the humans plan and play their game will determine how soon we can revert to normal lives. And that is why testing to establish the extent of the virus spread is very important, for indeed no game can be worn until the extent of the threat is known.

Covid-19 incidence statistics are as good as the extent and quality of testing, and this is what every country including Kenya should be focusing their wits and resources on.

Effectively planned and executed virus testing establishes facts to guide extent of restrictions needed and how and when to re-open the economy. And for Kenya, there is no shortcut to this approach, for indeed the virus may already be dancing with us in our daily routines.

Otherwise, for the revival of the oil industry we have to keep watching gains made on the virus war.