Oil demand unlikely to increase

Oil production has been slashed as demand dropped during the Covid-19 pandemic. Image credit: shipsandports.com.ng

The oil industry is in tatters after lockdowns and restrictions during the outbreak of the Covid-19 pandemic. The bad news is that is it highly unlikely that demand for oil will increase any time soon.  

Shutdowns because of the Covid-19 pandemic has decimated the global oil and gas industry. For the oil relying African economies like Nigeria, Angola and Equatorial Guinea, the impact has been devastating. What makes matters worse is that the demand for oil and refined products is not expected to pick up any time soon.

Absa Corporate and Investment Banking (CIB) head of natural resources Shirley Webber predicts that the reduced demand for oil and refined products as a result of national lockdowns across sub-Sahara Africa could last for at least another six months.

Webber says national shutdowns have affected fuel and refined products, primarily because of less traffic on the roads, and no passenger flights being allowed following the closure of many international borders. Oil companies have not been able to make up for this reduced demand by selling to customers operating in essential services as large sectors of economies were shut down because of the lockdowns.

“We expect that this reduced demand scenario will persist for some time with consumption levels only expected to reach pre-Covid-19 levels towards the end of 2021. How oil companies and traders will survive during this period will largely depend on their operating models,” says Webber.

Cashflow of oil companies has been affected by reduced capacity at refineries, as people have been buying less fuel and oil products due to restrictions on travel in many countries. In response, the oil majors have been forced to reduce their refinery capacity to save costs and preserve cashflow by between 25% and 40%. Some have slashed their capital expenditure budgets by as much as 30%.

Webber says the key lesson of the COVID-19 induced shutdowns is the importance of risk management, especially when it comes to hedging strategies to protect balance sheets against currency and commodity price volatility.

For example, we have seen the oil sector, in some cases, hedging their production at between USD60 and USD90 a barrel. Had they not done that they would have been in serious trouble. The price of oil has dropped to record lows in the last four months and is unlikely to recover for a while based on current trends and developments,” says Webber.

She adds that another important lesson is to ensure access to adequate liquidity facilities on the right commercial terms, such as tenor. “Absa has been engaging with its clients to understand their liquidity requirements and how they are managing under the current stressed economic conditions. Reduced demand can put pressure on cashflows and balance sheets, which emphasises the importance of a company having ready access to a standing facility which can be used during times of trouble,” Webber advises.

“What is important is that the terms of such facilities have to be favourable and not too onerous on the business because there is balance you need to strike in order to preserve both the business and your ability to operate under stressed scenarios such as these we are witnessing globally,” she concludes.

 

Leave a Reply

Your email address will not be published.

4 × 4 =