The Covid-19 pandemic is expected to have a bigger impact on the oil industry than the Saudi-Russia price war, analysts project in an O&G sector update.
KUCHING: The Coronavirus Disease 2019 (Covid-19) pandemic is expected to have a bigger impact on the oil industry than the Saudi-Russia price war, analysts project in a recent oil and gas (O&G) sector update.
AmInvestment Bank Bhd (AmInvesment Bank) viewed the ongoing Saudi-Russia oil price war, which catalysed the plunge in crude oil prices following the failure of the meeting between the Organisation of the Petroleum Exporting Countries (OPEC) and its allies on additional production cuts, has a lower impact compared with the massive Covid-19-inflicted demand loss.
The research firm noted on demand loss, the International Energy Agency (IEA) and oil trader Vitol both estimated at 20 million barrels per day, with some forecasts reaching 30 million barrels from the growing global lockdown.
“This accounts for 25 per cent to 37 per cent of 2019 global demand,” AmInvestment Bank said.
“In an unprecedented regime which has never occurred in wars, famine or oversupply conditions, the world has essentially begun to shut down in transportation, in which vehicles account for 40 per cent of global crude oil demand and airlines 10 per cent while petrochemical 30 per cent.
“As such, Vitol has indicated that global storage facilities are expected to reach maximum utilisation by the end of this month with the duration of Covid-19 remaining uncertain at this stage.”
AmInvestment Bank recapped that national oil producers have begun to cut back on production, with Brazil’s Petrobras doubling its daily reduction to 200,000 barrels – nine per cent of its current output of 2.1 million barrels.
The research firm highlighted that during the 2015 to 2017 down cycle when the oil price fell to US$26 per barrel, Petrobras did not significantly scale back its production while only slowing down on its exploration and development capital expenditure (capex) rollout.
“This major offshore producer has signalled intentions to delay payments and renegotiate contracts with its suppliers to conserve its cash flows, a move which it did not resort to in the past.”
According to AmInvestment Bank, the worst impacted would be those with upstream production sharing contracts such as Sapura Energy Bhd and Hibiscus Petroleum Bhd, followed by fabricators such as Malaysia Marine and Heavy Engineering Holdings Bhd (MMHE) and offshore support providers Bumi Armada Bhd and Velesto Energy Bhd.
“Even though companies such as Dialog Group Bhd will benefit from heightened demand for tank terminal storage facilities, we expect project deferrals and cost renegotiations on existing contracts by oil majors to compress margins and volume for specialist or maintenance services as well as engineering, procurement and construction activities.
“While very large crude carrier (VLCC) petroleum tanker rates have escalated on the rapid increase in floating storage demand, MISC Bhd is unlikely to capitalise on it in the near term as its large vessels are on long-term charter; yet its liquefied natural gas (LNG) vessels may encounter charter terminations, which had occurred during the previous down cycle.”