Consumers Must Brace For A Rough Ride As Oil Price Sets To Swing In Favour Of Producers (Article)

By: Nana Amoasi VII, IES

Crude oil prices have slumped in 2020, with global benchmark hitting a 21-year low below US$16 per barrel in April. On Monday April 20, West Texas Intermediate (WTI) crude price fell by more than US$50 per barrel to close the day’s trading at negative US$30-plus; first time oil price have turned negative.

The price slumps has taken place against price directions as forecasted by investment houses, oil majors, banks, research analysts and consultants. Key energy think-tanks, oil trading companies and financial services firms such as the US Energy Information Administration (EIA) and Fitch Solutions were convinced that Brent crude price could average US$61+ per barrel in 2020, seeing the year open with a price of roughly US$66.25 per barrel.

The spread of the coronavirus (COVID-19) emanating from China and spreading to other parts of the world significantly dented demand for crude and finished products, due to restrictions imposed. The price war Saudi Arabia and Russia that followed supply cut disagreement worsened the situation, resulting into pronounced build-up of oil stocks around the globe, and plunging prices deeper.

While the drop in prices favoured oil consumers (demand side), the development have overwhelmed the already troubled oil industry (supply side), and even oil producing countries, as they depend on oil revenue to support their national budgets.

Impacts On Supply Side

Low oil price environment impact massively on operating performance of upstream oil and gas companies, which typically reduces their ability to invest in additional capital investment, decreases the incentives for upstream investment spending, delaying or cancelling new projects, and cutting back on dividend payments et cetera (EIA 2015; Kaiser and Pulsipher 2006).

Since the coronavirus pandemic took hold and sent oil prices tumbling, oil companies have been slashing exploration and production budgets, cutting back on dividends and jobs by the hour; as many of their operations are unsustainable and deep in the red at US$30 per barrel for particularly WTI crude.

Oil majors such as ExxonMobil, Chevron, Shell and BP including many others were compelled to re-evaluate their capital expenditure (Capex) and operating expenditures (Opex), with multi-billion dollar projects likely to be in limbo. Apache Corporation, Devon Energy, and Murphy Oil have all announced slashing their 2020 capital investment plan by a massive 30 percent or more, amid the latest collapse in oil prices. Apache indicates that it would cut its budget by more than 37 percent from a US$1.6 billion-US$1.9 billion range, and slashed 90 percent of its dividend payment to investors, from 25 cents per share each quarter down to 2.5 cents per share. Murphy Oil Corporation, though is maintaining its commitment to dividend payment, announced slashing its capital expenditure plan for 2020 by 35 percent (S&P Global, 2020). Bloomberg reports that Occidental Petroleum have had to slashes its quarterly dividend to 11 cents a share from 79 cents, and rein in spending this year by about 32 percent to about US$3.6 billion.

Tens of thousands of oil workers including Texans are being laid off across the US, in places like the Permian Basin shale fields in west Texas as companies shut down their drilling rigs, according to Ryan Sitton, a state oil and gas regulator. Drilling service company Canary LLC has already cut 43 workers, with Recoil Oilfield Services laying off 50 workers after the water-transfer company lost all of its work with shale giant EOG Resources Inc. The biggest blow so far came from Halliburton, the world’s dominant fracking-services provider, which announced furloughing 3,500 workers at its Houston headquarters (Bloomberg, 2020). According to Rystad Energy, the shrinking workforce is the direct result of a torrent of cuts in capital spending from U.S. explorers, some US$12.6 billion so far.

Ghana has so far not been spared of the devastating impact of the low oil prices and supply chain disruptions, on oil producers. In April, Aker Energy and its partners announced postponing the development of the Pecan field in the Deep Water Tano Cape Three Points (DWT/CTP) lock offshore Ghana, as a result of disruptions caused by the coronavirus pandemic. Meanwhile, Tullow Oil is encountering similar challenges at its Jubilee and TEN fields.

Impact On Demand Side

On the demand side, it has been such a relief for fuel consumers, as the excess oil supply resulted in low oil and fuel prices on the international market; translating into low fuel prices at the pumps.
For instance, motorists in South Africa have enjoyed unprecedented fuel price savings, seeing huge decreases in fuel prices over the past few months, based on local and international factors. The international factors includes the fact that the country imports both crude and finished products based on international market prices, and the local determinants includes the Rand/US$ exchange rate exposure. The Rand have depreciated against the US Dollar over the period, however the huge decreases in the price of crude and petroleum products on the international market have translated into the huge savings for consumers.

In the United Kingdom (UK), data from the Department of Business, Energy and Industrial Strategy shows that petrol prices have hit a 4-year low, selling at £1.09 per liter, thanks to the impact of the coronavirus.
Also in Ghana, consumers have enjoyed some relatively low fuel prices since January 2020. Price of Petro (Gasoline) which stood at Gh¢5.36 (US$0.9) per liter in January 2020 is currently going for Gh¢4.01 per liter on average terms; suggesting roughly, a 25 percent drop in local Gasoline price since January.

Pendulum Set To Swing

The prices of physical crude cargoes are rallying hard across the world. On Wednesday May 20, international benchmark Brent surged to US$35.75 per barrel; the highest level since March when Saudi Arabia and Russia’s price war was launched. Brent crude traded on the intercontinental exchange (ICE) Futures Europe was reported on Thursday as nearly doubled over the past month, as it traded above US$36 per barrel, while America’s West Texas Intermediate (WTI) price has also soared.

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Standard and Poor’s Global Platts benchmark for fuels also shows average Gasoline and Gasoil prices has moved upward by roughly 55 and 33 percent respectively, since May 11 when the last Pricing-window closed in Ghana. On Monday May 18, Gasoline spot price closed at US$314 per metric tonne (US$37.6 per barrel) compared to the average price of US$203 per metric tonne (US$24.3 per barrel) recorded a week earlier. Gasoil has not been spared from the upward movements, as it closed trading on Monday at US$288 per metric tonne (US$38.6 per barrel).

The jump in prices is a reflection of curtailment of production to a great degree as initiated by the Organization of the Petroleum Exporting Countries, Russia and other allies known as OPEC+, and hopes that the relaxation of lockdowns around the globe will boost the demand for oil and fuels like Gasoil, Gasoline, and Jet fuel. Reuters reports that so far in May OPEC+ has cut oil exports by close to 6 million barrels, and at that there are evidence of fuel use recovery. The International Energy Agency (IEA) reports that mobility still remains limited for many citizens, but businesses are starting to reopen gradually and people are returning to work, which will provide a boost to oil demand, albeit a modest one at first.

It is unclear though, but if international prices continue the surge at the current rate to top US$35 per barrel, the pain of oil producers may start to ease. Higher oil prices would enable oil producers to cover their costs; increasing expected returns from future production, and increasing their ability to invest in additional capital investment.

However, fuel consumers must brace for an upward and a possible turbulent drive in next few months, should the recovery from the damage to demand on the international oil and fuel market be much quicker. Already, there are indications that the surge in the price of crude oil and petroleum product on the international market would reflect at local pumps.

In Belgium for instance, the Federal Public Economy Service (FPSE) announced on Monday May 18 an increase of 2.2 Cents to a maximum of €1.275 per liter for Euro 95 (E10) petrol, and 3.1 Cents upward adjustment for Euro 98 (E5) petrol to sell at a maximum price of €1.325 per liter. This basically means that it would cost more for motorists to fill their cars in the coming weeks.

Also in South Africa, the Automobile Association expects a fairly large petrol price increase in the coming June. It expects the price of petrol to go up by 50 Cents per liter on Wednesday June 3.
In Ghana, the benefits consumers have so far enjoyed at the local pumps may also begin to diminish. The national average price of Gh¢4.01 per litre for Gasoline (Petrol) may be the lowest to be recorded in 2020. Consumers must be prepared to buy same at roughly Gh¢5.0 per liter in the coming weeks, since oil marketing companies (OMCs) may adjust their pump prices to reflect changes on the international market.
It is insightful for consumers to note that the low fuel prices currently displaced at the pumps is basically the result of the coronavirus depressing fuel demands, and has absolutely nothing to do with government interventions.

Written by Nana Amoasi VII, Institute for Energy Security (IES) ©2019
Email: [email protected]
The writer has over 23 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as a resource to many global energy research firms, including Argus Media and CNBC Africa