A revival in manufacturing across the world holds the key to the mid-term recovery of oil and gas markets, with consumer demand likely to lag as the energy industry begins to recover from the twin shocks of the Covid-19 crisis and the resulting demand crash.
Participating in the latest online Adipec Energy Dialogue, Rachel Ziemba, an economic and political risk expert and Founder of Ziemba Insights, said the early signs from China, the first major economy to exit from the Covid-19-induced lockdown, are that manufacturing has bounced back more than consumption and that trend could be repeated in other countries.
“It is notable that the Covid-19 crisis and the associated economic and energy crisis has really been the first to blow out the global consumer,” Ziemba said. “2008 was much more of a hit to the financial sector and manufacturing. This time it is the reverse. The big question is how quickly consumer demand will come back.”
Ziemba added it could be well into 2021 before oil and gas markets get to volumes approaching where the industry was at the end of 2019.
Looking at the trends likely to impact the recovery of oil markets in the mid-term, Ziemba said the Opec Plus group of producers has had some success in tightening the market. But a question mark hangs over how long supply can be constrained.
“The challenge is that a few countries, those that are most economically strapped and not eligible for debt relief, are not complying in full and some have barely reduced production,” Ziemba said.
“Despite pressure from the likes of Saudi Arabia and Russia, it is going to be very difficult for them to comply because these are countries that had big fiscal deficits when oil was $70 a barrel.
“The other challenge is that we are starting to see parts of the US shale industry starting to reverse shut ins. We are also seeing more rig activity after many weeks of decline. In a price range of mid-30s into a 40 range, there will be more entities that can make some money and the risk is that it puts even more pressure on Opec Plus. So, I do think the most likely scenario is a rolling over and extension of the supply cuts.”
Access to credit, to support economic recovery, is an additional challenge for indebted oil producing countries, which are having to deal with multiple shocks at the same time, including sizable outbreaks of the Covid-19 that may or may not be under control. Many of the oil producers that are in a tougher financial position than their rich peers are too wealthy to qualify for debt relief, Ziemba said, heightening social, political and economic risks which could further impact the oil and gas industry.
Elsewhere, as oil and gas companies seek for ways to recover, Ziemba said she expects to see some industry consolidation, particularly in the United States with more cash rich entities looking to go into smaller, more speculative areas that are lower cost. She also highlighted the possibility of further job cuts as companies become leaner and decide between boosting commercial reserves, or partnering with governments….