Uncharted territory

OPEC Bulletin Commentary April-May 2020

There is an expression that has been swirling around the energy industry over the past few weeks. We have heard it on television, over the radio waves and in newspaper articles.

No matter the source or who is being interviewed — energy analysts, energy ministers, journalists or experts from academia — they all unanimously agree that the COVID-19 pandemic has transported the world into uncharted territory. The world has been caught upstream without a paddle and is struggling to reach land.

In reality, the expression uncharted territory has been utilized far beyond the energy industry, as a way of trying to grasp the harsh reality of a global pandemic that has grinded nearly every aspect of our lives to a halt, literally paralyzing our every move.

Above-all, though, at its core, this is a human tragedy brought on by a devastating health crisis that, as of this writing, has exacted a harrowing loss of life upon more than 350,000 victims around the world. The crisis is, sadly, far from over as it continues to grapple with more than 5.6 million confirmed cases globally.

Our eyes are pained to witness massive makeshift tent hospitals that have been erected to cope with treating the high number of people infected with the virus. Until recently, these public parks were the domain of everyday leisure activities — picnics, soccer games and ultimate frisbee tournaments, just to name a few. And we shutter at the daily news reports of rows of caskets awaiting transport to burial sites, where families of victims are not even allowed to attend funerals. Our hearts ache for the loved ones of those that have been affected by this crisis.

As citizens around the world continue to grapple with the ongoing human tragedy, nearly every other dimension of our daily lives has been impacted in one way or the other.

One area that has been severely affected is the global economy, which has been pummelled by the fallout from this pandemic, to such an extent that economists have gone from forecasting a recession to citing the potential for a longer drawn out economic depression. For older generations who lived through the Great Depression of the 1930s, these warnings are especially alarming.

In its April World Economic Outlook, subtitled ‘The Great Lockdown’, the International Monetary Fund forecasts the global economy will contract by an estimated three per cent in 2020, which is worse than during the 2008 and 2009 financial crisis.

This economic destruction is, by extension, wreaking havoc on the global oil and gas industry, which is suffering from a massive one-two punch of unprecedented demand destruction and record levels of supply rapidly filling up storage capacity around the world.

At a recent energy briefing webinar held with the Center for Strategic and International Studies, OPEC Secretary General, Mohammad Sanusi Barkindo, acknowledged the unparalleled nature of this pandemic and the impacts it was having on the global energy industry.

He explained that in recent weeks, the Secretariat had been in the process of researching and reflecting back on OPEC’s rich history in preparation for this September’s 60th anniversary commemorations when the pandemic hit.

“At OPEC, we were in the midst of this (planning), and then of course, this unprecedented, unparalleled COVID-19 crisis erupted,” he explained. “So we turned to the history books; we dusted off the ancient OPEC texts; we sought examples from the past. And the stunning conclusion was: there has simply not been anything like COVID-19 in modern history.”

The massive scale of the damage being inflicted upon the industry required quick and decisive action. It was thus that OPEC and its partners of the ‘Declaration of Cooperation’ once again rose to the challenge by deciding on both the largest and the longest voluntary production adjustment in history.

The 9th and 10th Extraordinary OPEC and non-OPEC Ministerial Meetings held on April 9, 10 and 12, 2020, agreed to adjust downwards overall crude oil production by 9.7 million barrels/day, starting in May and June 2020; from July 1, 2020, to December 31, 2020, by 7.7m b/d; and from January 1, 2021, to April 30, 2022, by 5.8m b/d.

The breadth and duration of these adjustments were a clear indication of the firm commitment and motivation of OPEC+ to do what is necessary in the short term, but also to seek a sustainable stability in the medium to long term.

The historic decision was widely lauded among government leaders at the highest levels, including Saudi Arabia’s King Salman bin Abdulaziz Al Saud, Russian President Vladimir Putin and US President Donald Trump. In fact, President Trump, who typically would not be involved with such matters, took it upon himself to help shepherd the parties to consensus.

Another indication of international support for the decision was seen in the emergency meeting called by the G20 Energy Ministers in which the following statement was released: “We recognize the commitment of some producers to stabilize energy markets. We acknowledge the importance of international cooperation in ensuring the resilience of energy systems.”

In the aftermath of this historic decision, some industry analysts voiced their opinions that this decision did not go far enough to make a dent in the massive demand destruction, which some were forecasting to reach as high as 30 per cent. However, these voices did not take into consideration what the oil market would look like today without this rescue mission carried out by OPEC and its partners.

“If OPEC+ had not acted in a decisive manner, the oversupply would have added a further 1.3 billion barrels to global crude oil stocks, and hence exhausted the available global crude oil storage capacity within the month of May,” Barkindo said.

In the aftermath of the Ministerial meetings, it was steadily becoming clear that the massive scale of the challenge would require a long and drawn-out recovery effort by all stakeholders to restore the oil market back to balance and growth.

This stark reality was reinforced on April 20, 2020, a day that will do down in history as ‘Black Monday’ when oil prices turned negative for the first time in history and the WTI futures price dropped to a negative $37.63.

To navigate the choppy waters that are yet to come as the industry traverses this ocean of volatility, every single industry stakeholder will need to do its part to contribute to this staggering recovery effort.

Barkindo alluded to this recently when he said: “The global nature of the oil demand destruction, and the impact being felt by all producers, has created a stage for broader dialogue with producers outside of OPEC+, as well as with consumers.” He also extolled the “enduring power of cooperation among nations, organizations and entities to surmount challenges by working together.”

And indeed, through the ongoing ‘Declaration’ and ‘Charter of Cooperation’ frameworks, there is a great potential to expand dialogue and cooperation as recovery efforts continue to intensify.

US Secretary of Energy, Dan Brouillette, attended the G20 Energy Ministers Meeting and joined the Secretary General and Saudi Minister of Energy in emphasizing that a concerted effort among all global stakeholders would be required to blunt the downward pressure being exerted on the oil market.

“Make no mistake: Today’s crisis transcends the interests of any one nation and requires a swift and decisive response from us all. Failure to act has far reaching consequences to each of our economies.”

So, yes, we most certainly find ourselves in uncharted territory, but if all industry players can unite in a spirit of solidarity and multilateralism, we will once again prevail stronger than ever.              

And indeed, we are starting to see the light at the end of the tunnel. In recent days, signs of a recovery in oil demand have become apparent as nations begin to open up their economies again. In some of the world’s largest oil consuming countries, nationwide lockdowns have ended or are being phased out, and signs of normal life are coming back.

In addition, the OPEC+ adjustments, in tandem with additional voluntary and non-voluntary adjustments by other producers, are starting to make a difference in bringing balance back to the market. Many analysts are saying we’ve now seen the worst, and better times are coming. This is the much-awaited silver lining on the horizon that the global oil industry has been eagerly waiting to see.

OPEC Bulletin April-May 2020

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