In early 2020, the oil market appeared to have weathered the storm of the 2015 price collapse, having responded with considerable accomplishments. By November 2017, domestic crude oil production had recorded its highest level in U.S. history. International trade in crude oil and petroleum products was booming with exports of 6.6 million and imports of 10.3 million barrels per day (bbls/d) in January 2018. New and substantial oil discoveries were being made from international oil fields, and the average price of Brent stood at US$57.05 for 2019.
Key energy think-tanks, oil trading companies and financial services firms such as the United States Energy Information Administration (EIA) and Fitch Solutions were convinced that Brent crude price could average US$61+ per barrel in 2020; seeing the year open with a price of roughly US$66.25 per barrel.
When all seem to be going well, boom! Things changed. Another storm hits.
That in a matter of three (3) months, the price of Brent dropped over 55 percent from US$68.60 per barrel price recorded on January 03 to US$22.76 per barrel on March 30. In addition, after struggling to rise to US$34.11 per barrel in early April, it took another nosedive to trade below US$20 per barrel on April 21.
The 2020 oil price slump happened against price directions as forecasted by investment houses, oil majors, banks, research analysts and consultants. The group was compelled to recalibrate their forecasts after failed price expectations in 2020.
For instance, the asset management firm JP Morgan cuts its outlook for oil, suggesting that Brent could drop to US$17, after predicting in December 2020 that Brent will average US$64.50 per barrel in 2020. The U.S. Energy Information Administration (EIA) also lowered its 2020 forecast for both West Texas Intermediate (WTI) and Brent, according to its Short-term Energy Outlook report released 07 April 2020, suggesting that Brent prices will average US$33.04 per barrel for 2020. In addition, Goldman Sachs was compelled to lower its earlier forecast of US$63.00 per barrel for 2020 to US$20 per barrel for both WTI and Brent in the second quarter of 2020.
Covid-19 to Blame
The fall in international oil prices since the beginning of 2020 was largely attributed to the spread of the Coronavirus, emanating from China and spreading to other parts of the world. Travel restrictions and flight cancellation across the globe, as well as close of shops and production outlets in and around China, had induced less demand for oil and fuels.
By close of trading Friday 06 March 2020, crude oil prices had fallen by over 30 percent from the beginning of the year, because key refiners are cutting down on production due to less demand for fuels. Prices of fuels like Gasoline, Gasoil, and Jet fuels had also falling by more than 35 percent on average terms under three month.
The decision by OPEC+ members not to cut down crude oil production as they met early March 2020, further weighed down on crude prices. The meeting had ended without a deal, as Russia and Saudi Arabia, the two biggest exporters, communicated their willingness to maximize production and flood the oil market. After the meeting, the Saudi’s announced a huge discount on their crude price, signaling a price war.
On the opening of the following Monday’s trade, international Benchmark Crude tumbled more than 30 percent, on the back of the no OPEC+ deal. The fall in price was the largest one-day fall since the start of the Gulf War in 1991. Cumulatively, the fall in crude oil price since the beginning of the year was more than 50 percent, as at early March.
The growing supply glut in oil markets following Saudi Arabia’s decision to pump more in the face of falling demand, ended up filling all storage tanks worldwide, causing prices to drop even further. The development overwhelmed an already troubled oil industry, forcing production shutdowns. The glut at a point caused traders to offer their cargos at steep discounts in a desperate effort to find buyers.
The hydrocarbon industry’s pain, particularly for oil and gas, is noted to have always followed an oil price slump, and it can be excruciatingly painful when it comes to market permutations in a cyclical business facing a once-in-a-generation event. In recent memory, the industry has either faced a demand crisis like the global financial crisis of 2008 – 2009 or a supply glut that surfaced in 2015 – 2016.
The year 2020 was another that the industry had to endure painful experiences, from price slump following demand destruction. It is so because the oil and gas industry consists of many firms that stand vulnerable in the event of a sustained downturn in energy prices. That the fact remains that their pockets simply are not as deep as those of major sovereigns like Russia and Saudi Arabia, who they compete with in the oil market, and the price they need to cover their costs is higher.
The 2020 low oil price environment brought huge impact on operating performance of upstream oil and gas companies in the business of exploration and production (E&P), reducing their ability to invest in additional capital investment. The lower oil prices reduced expected returns from future production, thus decreasing the incentives for upstream investment spending. As a result, new exploration and development projects were either delayed or canceled, dividend payments were suspended, jobs were lost, and reduced investments in producing fields ultimately slowed growth in production volumes.
Falls and Cutbacks by Big Oil
Oil majors also called “Big Oil” such as ExxonMobil, Chevron, Shell and BP evaluated their capital expenditure (capex) and operating expenditures (opex) in 2020 in the face of declining oil prices, leaving multi-billion dollar projects in limbo.
The struggles faced by Big Oil in 2020 following the price slump clearly reflected in their share prices. ExxonMobil’s value in October 2020 was just half, what it was at the start of the year, and Chevron was down by a little less than 40 percent. Royal Dutch Shell Plc had also fallen, and even further in October 2020.
Big Oil took a big hit from the Coronavirus as shown in earnings reports. At close of third quarter 2020, U.S. oil giants ExxonMobil and Chevron reported another quarter of red ink as uncertainty over oil demand forced the petroleum sector to rein in spending. While both companies were hit by low commodity prices, ExxonMobil had the bigger loss, once more faced with tough questions from investors over its strategy as shares tumbled.
ExxonMobil, which was bumped from the prestigious Dow Jones stock index in August 2020 following a plunge in its market value, reported a loss of US$680 million, the third straight quarter without profitability. The company had reported US$3.2 billion profit in the same period of 2019. Revenues fell 29 per cent to US$46.2 billion in the quarter. Additionally, in October 2020, ExxonMobil announced cutting 1,900 U.S. jobs, part of a plan to reduce global headcount by about 15 percent through 2022.
At Chevron, which has a much lower debt than ExxonMobil, the loss came in at US$207 million, compared with profits of US$2.6 billion in the year-ago period, as revenues fell 32.3 percent to US$24.5 billion.
At end third-quarter 2020, though the Anglo-Dutch company Royal Dutch Shell reported adjusted earnings of US$955 million for the three months, it came nowhere close to the net profit of US$4.77 billion recorded over the same period a year earlier.
Rising from the Ashes
Fast forward to 2021, Anglo-Dutch energy major Royal Dutch Shell has rebounded into profit. The oil major is reporting that its second-quarter income attributable to shareholders was US$3.43 billion or US$0.44 per share compared to a loss of US$18.13 billion or US$2.33 per share in the prior year. In addition, adjusted earnings were US$5.53 billion compared to US$638 million last year. Total revenue and other income for the quarter is reported to have grown to US$61.76 billion from US$32.49 billion last year. In the interim, the company has declared a dividend of US$0.24 per share, and launched share buyback of US$2 billion, which is targeted to be completed by the end of 2021.
Exxon Mobil Corporation has also announced in end July 2021 an estimated second-quarter 2021 earnings of US$4.7 billion, or US$1.10 per share assuming dilution, compared with a loss of US$1.1 billion in the second quarter of 2020. Second-quarter capital and exploration expenditures were US$3.8 billion, bringing the first half of 2021 to US$6.9 billion, which is consistent with planned lower activity in the first half of the year. The company anticipates higher second-half planned spending on key projects, including Guyana, Brazil, Permian and in Chemical, with full-year spending towards the lower end of the guidance range of US$16 billion to US$19 billion.
BP is also on record to have swung into profit in the third-quarter 2021, with net debt falling to US$32.7 billion at the end of the second quarter. The second-quarter profit for the period attributable to BP shareholders is reported as US$3.12 billion compared to a loss of US$16.8 billion last year. Underlying RC profit for the quarter is said to amount to US$2.8 billion versus a loss of US$6.7 billion incurred a year ago. Total revenues and other income surged to US$37.6 billion from US$20.8 billion generated in the same period of last year.
These sterling performances from “Big Oil” can only be attributed to an improved oil price environment. At current prices of roughly US$70 per barrel is a great pivot for lifting oil majors from the ashes left by Covid-19.
The writer has over 24 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as a resource to many global energy research firms, including Argus Media and CNBC Africa.