Everyone knows that the oil and gas sector tend to be volatile. Its pricing is no different. We will often hear of the oil and gas sector staffs getting laid off. Or how the prices plunge to an all-time low. It’s volatile just like that.
Regardless of whichever industries, it tends to pick up. That is no exception to the oil and gas industry.
The novel Coronavirus has some hand in crashing the already-drowning oil prices. It has weakened not just the ever-tardy world economy, but it’ll certainly impact countries where they largely rely on oil and gas exports.
Oil and gas price has been running for less than US$100 per barrel since last year. As of 1 January 2020, this year gas price per litre only costs US$67.05. After the Coronavirus outbreak, prices dropped dramatically to US$30 per barrel. At one point it has even plunged to below US$0 per barrel. Imagine the huge loss the majority of oil and gas sectors and countries have suffered just from this.
Demand Shock Curtailed From The Oil and Gas Sector
To make matters worse, countries running on an oil and gas-dependent industry are also living a demand shock. Already at the beginning of the year, there were signs of an oil surplus – excess capacity in comparison to slower demand growth.
After the Covid-19 outbreak, the situation only worsens. The International Energy Agency estimates that, for the first time since 2009, the oil demand will fall compared to the previous year.
The Covid-19 has been showing to be not just highly contagious for human health, but also to the globalized economy. Countries and firms are reacting to the virus by quarantining people, getting staffs to work from home, cancelling events, among other things. These decisions are a direct hit to the transportation sector – which is the most oil intensive.
Approximately 29% of all energy consumption is used by the transportation sector and almost all of it (about 96%) comes from oil. The longer the virus is among people and social distancing measures are adopted, then oil price will still see an all-time low. It is one of the greatest impacts as a key consuming sector of the oil industry.
Helima Croft, global head of commodity strategy at RBC Capital Markets, talks about excess oil and gas storages in North America. She suggests keeping an eye on global oil and gas demands:
This is a really sort of interesting, unique story to the oil market. I mean, what has been hit the hardest by this pandemic has been vehicle traffic use. I mean, people are not flying. They are not driving. And so, this is a real story about storage filling up. … We’re expecting Cushing to reach tank tops by mid-May. I mean, there are other places that you can store this crude, potentially in, like, Louisiana, but until we get signs that U.S. gasoline demand is improving, that people are going to drive again, we are continuing to be very, very bearish on the demand outlook for oil. Now, there was this OPEC cut last week, this historic cut. There was a lot of focus on that. And that’s really sort of turning off the tap in the bathtub that’s overflowing, and so the situation would be far worse. But the problem is those cuts don’t take effect until May 1. There is still a lot of crude that is on the water right now that is going to refineries that do not need it. And so that is the challenge right now: Those OPEC cuts are not coming until May, a ton of crude on the water and demand continuing to collapse.
At the same time, Jonathan Golub, chief U.S. equity strategist for Credit Suisse, cautioned that some of the action-driving oil prices below zero were unreasonable:
There are some technical things going on with the futures contracts because they’re expiring and rolling over tomorrow, which makes this a little bit of an unreasonable read. If you look out further into the June contract or even the contracts that go out a year, they’re off, but they’re not off nearly as much. My concern, though, is that in general, lower oil — it’s not only about the energy sector, which is small, but it’s the impact that this is going to have on credit and banks and other sectors that lose money when these energy companies can’t pay their loans.
Will Oil Price Ever Recover? What Does That Mean For Malaysia?
Optimistically yes, but we should not raise our hopes. According to Bridget Welsh and Calvin Cheng, oil and gas price has been in deficit for the last few years. Even if it did raise, it does not mean it will reach beyond deficit numbers.
Perfecting Existing Problems
As a small producer and consumer of oil and gas, Malaysia has limited control to take on shifts in the oil and gas sector. It can be pro-active in using this crisis as an opportunity to re-equilibrate its economy, strengthen revenues, build stronger political cooperation over managing oil and gas, and offset the negative effects of the global pandemic and economic slowdown.
Malaysia Kini has offered three concrete suggestions for Malaysia to move forward:
1. Improve governance:Strengthen Petronas’ management by supporting leadership decisions that improves its capacity to be able to tackle economic difficulties ahead. A critical component of this is to improve Petronas’ transparency and public accountability. At the same time, it’s good for the entity to increase the professional oversight over the management of political funds beyond what the prime minister has to provide. It is significant to bring in more non-partisan professionals into oversight.
2. Increase engagement with stakeholders:Reach out to the states and vicinities that are in the front line of the negative effects of a contraction in oil and gas, assuring that they are appreciated stakeholders in the economic recovery process and will also receive their fair share of available profits. Using oil-related funds as a political tool will only escalate tensions and splinter politics further. Given the high level of poverty and tenacious infrastructure needs in the states with oil and gas, there has to be more presence and fairness in revenue distribution.
The federal government should evocatively engage in dialogue and consultations and respect all state governments to prevent further undercutting the economy and assuring political stability to manage continuing headwinds. Given the fractious nature of politics at both the federal and state level, it is vital to have broad discussions on deals made to include the opposition and public, as segregation will inevitably only serve to disseminate tensions over oil revenues.
3. Enhance revenue sustainability:To strengthen government revenues and reduce dependence on oil-related revenues including Petronas, the government needs to consider new procedures and revamp its fiscal system. Revenue sustainability strategies will ultimately pivot on broadening the tax base through increasing tax compliance, while increasing the coverage of existing indirect taxes. New kinds of taxes on capital gains, wealth, or the restoration of a consumption tax may eventually need to be considered – all keeping in mind that the recovery ahead for businesses and workers will be exciting and takes arduous time.
With all that being said, the oil and gas industry may see an increase in its price. However, do not expect to see it going beyond its sluggish deficits anytime soon.
News Rehashed From:
CNBC, Malaysia Kini, Asia School of Business, Deloitte Report, and PR Newswire.