Mid-market oil & gas companies barreling along until demand picks up
Energy Infrastructure Market Report
In March, two of the largest oil producers in the world, Saudi Arabia and Russia, decided to essentially end their loose coordination of oil production. With the United Arab Emirates joining Saudi Arabia, this effective trade union disintegrated and set off a race for market share in the global oil markets, collapsing prices overnight. By this point the world economy had entered the stark reality of a decline in consumer and commercial energy demand, driven by the COVID-19 crisis. The timing for a return to economic growth remains uncertain. With an oil market awash in growing crude oil production from US shale, demand growth has reversed course to demand shrinkage, and it is uncertain when it will recover. However, as we will discuss in this report, the major oil-producing nations of the world (led by the US) are now cooperating to bring about a more orderly transition into this new world of lower — perhaps transient — demand.
On 9 March the IEA reported its first decline in demand since 2009, due to the coronavirus outbreak. The Russia-Saudi Arabiadriven supply glut caused prices to drop more than 20% virtually overnight. As demonstrated in the graph below, the world market is well-supplied due to three primary factors: (1) the trade battle between Russia and Saudi Arabia, (2) drastic declines in economic activity due to the COVID-19 pandemic and the social measures taken to slow the infection rate, and (3) seasonal (scheduled or unscheduled) refinery maintenance reducing demand from those that process crude oil into various fuels, such as motor gasoline, jet fuel and diesel.
Oil production could remain low as price craters; middle-market oil & gas companies feel the pain as COVID-19 crisis evolvesNEAL PATEL, ENERGY INFRASTRUCTURE SPECIALIST, OAKLINS
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The current unprecedented COVID-19 situation has thrown the oil & gas industry into turmoil and left it sailing in uncharted waters. Oaklins’ energy infrastructure specialist, Neal Patel, gives us an overview of the additional factors that helped contribute to the market drop – such as the disintegration of Saudi Arabia and Russia’s oil coordination efforts – to help explain how a worldwide decline in demand is having dire consequences. In terms of M&A, Neal expects the main focus to be on capitalization, whereas traditional M&A will go out of the window.
A recovery timeline is still not certain given the fact that the coronavirus spread has stalled economies across the globe and that they will undoubtedly reopen in staggered stages. However, it is not all bad news: while we cannot predict exactly what prices will be doing in the near future, Neal sees some positive signs in the future and expects that demand will increase and be as strong as before. For more expert commentary in this sector, download a full version of the report as pdf.
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