In recent months, the world oil industry has witnessed unprecedented difficulties when major economies closed down to prevent the epidemic. In the first quarter of this year, many times the price of a European Brent oil barrel lost more than 50% compared to the same period in 2019 and more than 40% compared to the previous quarter.
Challenges have arisen was the dispute between the world’s two largest “black gold” suppliers, Saudi Arabia and Russia, raged at a summit of the Organisation of the Petroleum Exporting Countries (OPEC) and its partners (known as OPEC+).
Disagreement between the two countries has “poured fuel on the fire”, leading to the collapse of oil prices acrossinternational markets. The resonance between the COVID-19 epidemic and the “oil price war” of oil-exporting countries pushed the market into historically dark days. WTI oil price in the US market actually fell into a negative level at the end of April.
After OPEC and its partners reached an agreement on output cuts and this agreement took effect, oil prices recently recovered to US$30-35 per barrel as at the beginning of the year. Oil producing countries have reduced production from 42-43 million barrels a day to 34 million barrels a day. In addition, a number of shale oil and gas producers in the US stopped production while Kazakhstan had to stop production at Tengiz oil field due to COVID-19.
However, these factors couldn’t make the global oil market prosper. Analysts are still concerned that cheap oil prices will continue in the context of the COVID-19 epidemic is crippling the global economy.
At present, China’s “economic machine” has not been able to restart as quickly as expected, while the world’s number one economy, the US, is also heavily affected and has not seen the “light at the end of the tunnel”. Other major economies are all experiencing slowdowns. This situation weakened the demand for oil and led to the excessive supply of oil. The French Institute for International and Strategic Affairs (IRIS) has said that the oil consumption index in April decreased by 20 to 30% globally compared to the same period in 2019.
Large oil corporations such as ExxonMobil, Chevron and BP are facing great challenges in attracting investment, as investors are now looking for places with lower risk and higher profits. According to the British magazine Economist, energy is the weakest sector of the S&P 500 index for the past six years. ExxonMobil’s breakeven price stood at US$70 per barrel. The fact is, not many investors want to “bet” on the risky oil field now.
It is worth noting that the challenge for the oil industry and oil enterprises is actually a big challenge for economies, especially the “black gold” exporting countries. For example, in Saudi Arabia, the economy is almost entirely dependent on the oil industry, the country can only balance its budget with an oil price of about US$80 per barrel. In the US, if the price of oil is below US$65 per barrel, all shale oil producers are operating at a loss. Even non-oil-dependent economies are facing numerous difficulties due to the negative impact of falling oil prices. During the 2016-2019 period, four key French banking facilities provided US$24 billion to the shale industry in North America.
The oil industry has been seriously affected by the COVID-19 pandemic. However, the price war between Russia and Saudi Arabia has also made oil prices plummet. According to economic experts, in order to overcome the current challenges, the most practical solution is that countries must work together to adjust oil production with reasonable market shares and join hands to push back the pandemic, to revive growth and heat up the global “economic engine” in order to push up oil demand.