Business Outlook 2020 - Activity and Supply Chain

BUSINESS OUTLOOK 2020: Activity and Supply Chain

Global Oil Demand and Supply Balance

120

Global Oil Supply and Demand

100

80

The UKCS is facing the consequences of the global oil market turmoil caused by the impact of COVID-19 on the global economy, both in supressing demand and halting expectations of global growth. As can be seen, the challenges within the oil market have intensified during April, as demand continued to be eroded and additional volumes from OPEC+ countries entered the market. Prices in the last month have averaged $22.50/ barrel (bbl) — 65 per cent lower than the January 2020 average — and Brent was trading as low as $16/bbl on 22 April, the lowest nominal price for more than 20 years. Subsequently OPEC+ countries have agreed to supply cuts of 9.7 million barrels per day (bpd) effective as of 1 May, with further reductions expected from non-members such as the US, amongst others, which could push total supply restrictions upwards of 15 million bpd. These are record supply reductions, but will still not be enough to balance the market in the short term, as demand has fallen by around 30 million bpd — back to rates last seen in 1995. Normally, low oil prices would boost demand and help to stabilise the markets. These are not however ‘normal times’, as demand remains constrained by COVID-19 due to more than half the world’s population being in ‘lockdown’. The IMF now forecasts that the global economy could contract by at least 3 per cent this year, a downgrade of 6.3 percentage points since January. If lockdown measures continue beyond the second quarter then the global economy could shrink by as much as 8 per cent. 1 The fall in GDP in some economies, including the UK, in April and May is expected to be around one-third. The IMF expects the impact of the economic crash will be even more significant than the 2008 financial downturn and the most severe contraction since the Great Depression of the 1930s.

60

MMbbl/d

40

20

0

2014

2015

2016

2017

2018

2019 Jan-20 Feb-20 Mar-20 Apr-20

Demand Supply The continued oversupply in the market has resulted in concerns around storage capacity, with inventories continuing to build at record rates. The impact of this was seen in mid-April when, for the first time, WTI (West Texas Intermediary) prices became negative in the US as a result of local storage constraints. Whilst WTI is an important regional benchmark for North America, there are questions around whether the Brent market could yet face similar issues. Although North Sea Brent does have more routes to market, there is the possibility of storage issues emerging if the current rate of oversupply persists and this will continue to be monitored closely. It is possible that if this issue escalates then production curtailments could be required. Unsurprisingly, Brent futures prices have also fallen, demonstrating that the effects of COVID-19 are likely to be prolonged. Futures contracts for the remainder of 2020 at the beginning of April show an average 40 per cent fall compared to those at the beginning of March. Futures contracts currently remain below $40/bbl through to at least the end of 2021. Source: IEA, Rystad Energy

1 https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/

6