Effects of COVID 19 Pandemic on the Energy Market Part 1: Oil and Gas Sector
Since the first case reported in China COVID 19 Pandemic, has affected the energy market in different ways. In this study, we focus on the oil and gas sector, as according to the American Geo Science institute, the oil and gas industry constitutes 31.8% and 28% of the energy sources consumed in the United States respectively, which together form around 60% of the energy sources consumption. Also, the energy market demand in this sector depends highly on the country’s transportations. According to the U.S. Energy Information Agency, approximately 28% of all energy used in the United States is currently in the transportation sector, Of that used, approximately 92% is produced by petroleum, 3% by natural gas, and around 5% through renewable energies. Considering the united states, approximately 51.7% of the energy produced by oil and gas is used in transportations. During the pandemic, the transportation industry was one of the main sectors influenced. In South Asia, the transportation level decreased by 60% of the normal levels between 28th March and 4th April. In The Middle East transportation dropped by 50%, South America by 45%, Southeast Asia by 55%, North America by 45%, East Assia by 42%, and the same is observed in the other parts of the world.
The restrictions implemented by the governments affected the energy sector. The demand for energy products reduced drastically. In January 2019, before COVID 19 Pandemic, worldwide oil demand hit 99.5 million barrels per day. However, as the spread of COVID19 cases got more, the energy demand started to decrease. According to IEA, The global demand in April was about 71.4 million barrels per day. This was the lowest amount recorded in the last 16 years in the united states. It is believed that will take at least till the end of 2021, to reach the same level of energy consumption in the world market. At the time of writing this article in May 2020, the demand hit 77.9 million barrels per day. Countrywise, in the United States It is expected that the consumption will be increased in the energy sector, which means that the demand for 14.1 million barrels per day in April 2020 will reach 15.8 million barrels per day in May. This value was 20.5 million barrels per day United States of America before the COVID 19 Pandemic pandemic in January.
Upon effective containment of the pandemic, the demand for energy-related products will increase. It is estimated that in June, the demand is expected to rise to 84.5 million barrels per day up from 77.9 million barrels in May. Therefore, the global oil demand in quarter 3 is expected to increase to 90.3 million barrels per day, and in quarter four increases to 94.7 million barrels per day. Likewise, in 2021, the global demand will increase to 98.1 million barrels per day.
The oil production declined in April from 49.3 million barrels to 43.5 million barrels in May 2020. Further, the investors and companies predict a decline in the production to 40.4 million barrels in June 2020. Besides, the forecast expects to see the oil production increase from 40.5 million barrels to 44 million barrels in July alongside the increase in demand.
Considering the oil and gas sectors, the number of oil and gas drilling rigs are considered as one of the main indicators of the optimistic expectation of the investors in the oil and gas sector. The number of wells drilled before the pandemic, in January and February 2020, were 1,558 and 1,238 respectively. The numbers decreased to 877 in March, 337 in April, and about 308 in May. A decline in the number of active rigs shows a pessimistic view of the investors on the market, especially in the short run.
In general, it is hard to believe that at any time, till the end of 2021, the world consumption in the oil and gas sector will reach the pre-COVID 19 Period of time. All the efforts done by the OPEC Plus and reduction in the oil and gas production, can not have a huge impact on the market. On the other side, the vast dependencies of the Oil producer nations, like Saudi Arabia, Iraq, Kuwait, and Russia, and also on their income from this sector, makes the production cut, harder for them. Their National Oil Companies also will be one of the main pillars of resilience against budget deficiencies. Countries like, Iran and Venezuela, which have been under the US sanctions, will use all their power to sell more, even much lower than Platte price as they see no other ways for keeping their economy from collapse.
Till the end of 2021, a negative effect on the following sectors will be predicted:
- Oil and Gas Upstream and midstream Sector
- Shale Gas
- Refineries and low-quality units of production
The petrochemical sector may be the only sector, which will face the least adverse effects in the next 2 years.
It is believed that the main fields of activities for the oil and gas companies to compensate for the adverse effects of COVID 19 to be either on reducing the costs of production or finding new models of contractual cooperation which leads to lower risks for the active players in this sector. So these companies should look for the restructuring services, in their Organizational Structure, new merging with the sectors with lower risks, and the advent of novel technologies, which lead to lower production costs.
It is also believed that the lower cost of the oil and gas, can lead to a negative parameter, against the profitability of the renewable energy sector. So this sector will be affected and the rate of growth in this sector may decrease till the time, that the price of the oil and gas be recovered to the price before COVID 19 Pandemic period.