The outbreak of coronavirus (COVID-19) has attracted global attention, causing a huge impact on society and economy across the world. Most countries have implemented the lockdown regulations and stay-at-home order to prevent the outbreak of COVID-19, causing an unprecedented impact on the oil and gas market.
COVID-19 brings uncertainty for the global oil and gas market as a combination of supply and demand shocks has sent oil prices plunging and financial markets tumbling.
Restrictions on movement and daily travel have caused demand shocks in the oil market. According to a report by the International Energy Agency (IEA), the global oil demand in April 2020 slumped to 19.9 million barrels per day as compared to last year. The global oil demand is estimated to gradually recover from 2Q20. The IEA now sees global oil demand at 99.9 million barrels a day in 2020, with a cut around 90,000 barrels (0.1%) a day from 2019.
The impact of COVID-19 caused a shock on global oil demand, which disrupted the global oil supply.
The global oil supply has decreased by 11.8 mb/d in May after the OPRC+ Declaration of Cooperation ‘DoC’ meeting. This is the historic output deal to cut production by 9.7 mb/d from an agreed baseline level. DoC is a meeting that aims to stabilise the market by adjusting the output of crude oil.
The pricing of WTI crude oil price range from USD $51 to USD $61 in Jan 2019-Jan 2020. The US crude oil faced 71% drop from Jan 2020 to Apr 2020, and a drop to -USD $38 on 20 April 2020. This is the first time that the US crude oil price has turned negative due to the supply over the demand.
Malaysia, as a net oil and gas exporting country, is highly vulnerable to price fluctuations in the global crude oil market.
As of 2016, Malaysia’s oil reserves are the fifth highest in the Asia-Pacific region after China, India, Vietnam and Indonesia, ranking 28th in the world and accounting for 0.22% of world’s total oil reserves of 1.65 trillion barrels. Malaysia consumes 708,000 barrels per day of oil as of the year 2016. Malaysia’s proven oil reserves were 3.6 billion barrels which equivalent to 13.9 times the annual consumption.
The fluctuations in the global crude oil market will also impact Malaysia’s domestic economy as Malaysia is heavily reliant on oil revenue. As of 2018, the oil-related revenue contributed around 20% of the federal government’s revenue. With the on-going price war between Saudi Arabia & Russia, coupled with lower oil demand due to the COVID-19, Malaysia is expected to lose billions of ringgits in oil revenue i.e. around RM12 billion if the price drops to USD $20, according to AmBank Group chief economist Anthony Dass.
What are the major trends that will affect the future oil and gas market?
According to IEA, Petrochemicals is set to become the most important growth driver for the global oil demand. Petrochemicals account for more than a third of the growth in global oil demand to 2030, and nearly half the growth to 2050, adding almost 7 million barrels of oil a day by then. They are also poised to consume an additional 56 billion cubic metres (bcm) of natural gas by 2030, and 83 bcm by 2050. Petrochemicals are set to account nearly half of the global oil demand in 2050, which staying ahead of trucks, aviation and shipping. Petrochemicals is said to be a “blind spot” of the global energy system in the study by IEA due to the less attention of the market.
The vehicle industry’s shift towards cleaner technology is believed to affect the oil market too. The electronic vehicle is a substitute for fossil fuel-powered cars. From 2017 to 2018, the global sales of electric vehicles doubled to nearly 2 million units, which highlights the transformation that is taking place in the automotive industry. Indeed, this is proven by the increase in Tesla sales that reached 367,500 units in 2019, about 50% increase from 2018. According to BoombergNEF’s “Electric Car Outlook 2019”, by 2040, electric vehicles will account for 57% of global passenger car sales.
The innovation in bioplastics will also bring a significant hit on the oil demand. Bioplastics are a kind of plastics produced from renewable biomass sources, such as vegetable oils, corn starch, straw, wood chips, recycled food waste, etc. Most fossil fuel-based plastics could technically be substituted with biobased plastics. According to Fortune Business Insights, the global bioplastics market size will exhibit a CAGR of 16.2% from 2019 and reach USD 19.93 billion by 2026. However, the IEA still sees a minimal impact on oil demand from bioplastics for the next two decades due to higher production costs.
In conclusion, the sudden spread of COVID-19 pandemic has changed the balance in the oil and gas industry, and the implementation of new technologies has transformed the market into the era of high-tech energy industry. To respond to the crisis, companies should maintain contact with their suppliers, distributors, and other stakeholder ecosystems to ensure short-term business continuity. The company must reconfigure its operating model and adjust its cost structure during the lock-in phase. Companies can use new technologies, including digital work methods, to mitigate human-related risks as well as exploring partnership and M&A opportunities to develop portfolio strategies for the future. The global oil and gas market is expected to recover in the last quarter of 2020 with the released of the movement control order.
Written by Sue Thin, Analyst at 27 Advisory. She is grateful to have a beach backyard to call home. Apart from appreciating nature, she is interested in everything related to fundamental & technical analysis and value investing.
Having more than 27 years in business, 27 Group is able to provide you with access to investors for competitive funding needs while providing better ways to operate your business through financial and corporate advisory. We are the only 100% Malaysian-owned local consulting firm that is fast, flexible and focused with unique expertise that blends of local socio-economic policy setting, engineering built assets globally and detailed in financial analysis.
We do project development integration to improve project returns and are committed to providing a sustainable environment for a better tomorrow. Our delivery model blends values important to humanity into business strategy through socio-economic transformation modules and we are passionate about building opportunities for the next generation to achieve their highest potential.
#rebuildinghumanity is 27 Group’s vision to collectively rebuild our nation through assets we build (eg. infrastructure, real estate, hospitals) and natural capital (gas resources, plantations, human talent) using innovative and sustainable methodologies.
Speak and rebuild with us if you need fresh ideas or more efficient financing or project implementation to improve your KPIs at ivan@27advisory.com.my
