Coronavirus looks set to have a continued impact on energy demand beyond the near term and supply chains must become more adaptable in order to navigate the uncertain future, writes Andy Laven, COO of Sahara Energy Resources DMCC
As coronavirus was spreading, and Europe moving into varying states of lockdown, the OPEC+ deal foundered as Russia and Saudia Arabia squared off against each in a fight for market share.
Increasing supply, whilst demand was reducing, was only ever going to end one way. Saudi Arabia and Russia finally let the principle of the “greater good” prevail but the agreed cuts, of 9.7mn bpd from May 1, still have supply exceeding demand.
In this situation the outcome is obvious: prices will fall until demand and supply balance. Unfortunately, with increasing lockdowns, the consensus is that demand has fallen by around 30mn bpd. If demand cannot increase, supply needs to be reduced, but this would mean shutting in wells, which can result in permanent damage to the reservoir – something oil companies try to avoid at all costs.
Further complicating the picture are negative oil prices in the US. The problem is partly driven by financial flows. In mid-April, the United States Oil Fund (USO) needed to sell its contracts to buy WTI because it isn’t able to hold physical assets. Unfortunately, everyone knew this and no one wanted to be a buyer – the primary storage location for WTI is in Cushing, Oklahoma, and is almost full.
You can’t take delivery of crude oil without having somewhere to put it. The only solution was to pay people to take the crude oil, which drove negative oil prices. Brent remains at around $20 because it isn’t landlocked like WTI and there is no equivalent to the USO.
Although the price of Brent has continued to slide it hasn’t experienced the dramatic moves that we have seen with WTI. A negative price is unsustainable, production will be cut and on average crude prices should stay positive.
Normally, a low oil price is good for the global economy. A reduction in the price of energy encourages business growth as costs are less. However, there are two problems. Has the pandemic reduced demand to the extent that in some sectors there may never be a recovery? And where demand does return, how quickly will it come in the different parts of the world?
The path to recovery is likely to be bumpy and everywhere will be moving at a different pace, so more of a wide U-shape than a quick V.
Whatever the path, oil will be a critical element of the recovery. Even though there isn’t much we can do to stimulate demand, the sector must prepare for recovery: positioning all aspects of the value chain to supply energy to countries, communities and individuals.
Transportation is a key facilitator of global trade, especially marine transportation. Land transport, trucks and other vehicles are an essential step in the delivery process. So, fuel oil and gasoil demand will likely start returning towards normality as the recovery progresses.
But air travel faces a different set of challenges. Cargo flights are part of moving goods around the world, but how quickly will people return to the skies when social distancing may become a long-term norm?
A shift in consumption – for example more driving, less flying – will see demand for products change. Refineries may need to change the way they operate and produce different proportions of each fuel, which may see some refineries unable to operate economically and being forced to close.
Where things change, though, there are also opportunities for new energies – when demand starts to pick up maybe the world will use it as an opportunity to take a step towards cleaner energies.
Countries are now starting to unlock, although with some stops and starts, setting the stage for demand to return. The oil market is exceptionally robust and will bounce back, but it would be a mistake to miss this opportunity to learn from the current challenges and build greater resilience in our supply chains for the future.
In this area, we are happy to lead by example. Resilience has always been a part of Sahara Group’s approach across the African continent, building a business that learns from the market conditions in order to adapt to and meet current requirements and changing circumstances.
What is the secret? Diversification. Our presence across the continent’s supply chain, from Nigeria to Tanzania and from Mozambique to Congo Kinshasa, has made room for this agility, weaving business continuity into the core of our work by constantly assessing where supply and demand exists and acting swiftly and efficiently to shift and re-balance the supply chain.
The world will continue to need energy and Sahara Group, buoyed by its vision of bringing energy to life, will work alongside other energy conglomerates and stakeholders to help meet global energy requirements with pan-African solutions.