Counting costs: Impact of coronavirus on oil markets 

OIL    COVID-19

By Johnmary Migadde

The covid-19 pandemic continues to bite across the world, affecting many sectors, including the oil and gas sector.

Some of the measures taken by countries to combat the spread of coronavirus include the closure of schools, universities, and industries. Suspension/cancellation of flights (British Airways and Emirates) to and fro affected countries, the lockdown of cities in China, Italy and Spain and declaration of a state of emergency in the US and Spain.

Others are travel bans/ restrictions to social places, such as night clubs and churches, self-isolation of persons arriving from affected countries and suspension of several European football leagues. All these measures will adversely affect the demand for oil and gas products.

The ban on travel and reduction of economic activity due to the pandemic implies that less fuel will be used (jet, gasoline, and diesel), while the shutdown of manufacturing centres and businesses will lead to less oil, fewer products manufactured from oil and their usage due to insufficient manpower and lack of demand.

 As the virus spreads globally, the question now is what will become of the oil and gas industry in 2020, how deep will the impact be and for how long? The effect of coronavirus on oil and gas markets is severe since it has curtailed the movement of people and goods, impacting global trade.

According to the Energy Information Administration (EIA), the US, China, India, Japan, Russia, Saudi Arabia, Brazil, South Korea, Germany, and Canada account for over 60% of global oil consumption. More to that, China accounted for 80% of global oil consumption growth last year. As the effects of coronavirus extend to other parts of the world, China will be affected the most since the pandemic has now restrained its ravenous hunger for oil.

 With the issuance of travel bans and reduction of economic activities in these countries, oil consumption is expected to fall to unprecedented levels this year. This decline in consumption could result in an oversupply of oil in global markets, leading to a reduction in production or/ and reduction in global oil prices.

Rystad energy, an independent energy research institute, postulates that the pandemic has brought about a shortage in demand and staffing in the oil industry, leading to a decline in investment, particularly in oil exploration and production to the tune of $30b so far in 2020. To further push the nail into the coffin, 22 floating production, storage, and offloading vessels out of the 28 currently being built are situated in the most adversely affected countries of China, South Korea, and Singapore.

EIA predicts that as a result of this pandemic, global oil demand will turn out to be 99.9 million barrels a day in 2020, which is a decline of 90,000 barrels from the previous year. Although EIA had forecast an increase in demand of 825,000 barrels per day this year.

Therefore, as Uganda explores its oil and gas reserves, it is worth noting that the revenues of countries that heavily depend on the two products' exports are going to be adversely affected this year. The reduction in oil and gas demand will add salt to the wound since oil-producing countries are yet to recover from an oil surplus last year that led to a decline in prices. However, the question is whether this decline in global prices will trickle down and lead to a reduction in retail oil pump prices.

Despite the reduction in global oil prices expected this year as a result of the coronavirus pandemic, speculators insist that the industry will recover in the latter part of the year as the coronavirus spread is suppressed across the world.

The writer is an engineer and manager at KPMG Uganda. The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG