BP has announced a $6.7bn quarterly loss after global demand for oil slumped during the height of the Covid-19 pandemic.
Oil prices fell dramatically as a result of the economic slowdown and turned negative for the first time in consumer history in April.
In the short-term, BP said it expected demand for oil could be up to nine million barrels per day lower compared to last year.
Shareholder dividends have been halved with forecasts for a challenging future ahead, while 10,000 jobs are to be cut – with around a fifth of the redundancies expected to be in the UK.
In response, BP said it wanted to move away from being a traditional oil company and reinvent itself as an integrated energy company by focusing on renewables and bioenergy as well as hydrogen and carbon capture and storage technology.
Beyond the immediate impact on health, the current Covid-19 crisis has major implications for global economies, energy use and CO2 emissions.
Analysis of daily data through to mid-April by the International Energy Agency (IEA) shows that countries in full lockdown during this period experienced an average 25% decline in energy demand per week and countries in partial lockdown an average 18% decline.
Daily data collected for 30 countries until 14 April, representing over two-thirds of global energy demand, show that demand depression depends on duration and stringency of lockdowns.
Global energy demand declined by 3.8% in the first quarter of 2020, with most of the impact felt in March as confinement measures were enforced in Europe, North America and elsewhere.
At the start of 2020, it was forecast that global energy investment would grow by 2%; instead, it has fallen by 20% – a fall in spending of $400billion.
Covid-19 impact: the IEA’s sector-by-sector energy breakdown (for the first quarter of 2020)
Global coal demand was hit the hardest, falling by almost 8% compared with the first quarter of 2019. Three reasons converged to explain this drop. China – a coal-based economy – was the country the hardest hit by Covid‑19 in the first quarter; cheap gas and continued growth in renewables elsewhere challenged coal, and mild weather also capped coal use.
Oil demand was also hit strongly, down nearly 5% in the first quarter, mostly by curtailment in mobility and aviation, which account for nearly 60% of global oil demand. By the end of March, global road transport activity was almost 50% below the 2019 average and aviation 60% below.
The impact of the pandemic on gas demand was more moderate, at around 2%, as gas-based economies were not strongly affected in the first quarter of 2020.
Renewables were the only source that posted growth in demand, driven by larger installed capacity and priority dispatch.
Electricity demand has been significantly reduced as a result of lockdown measures, with knock-on effects on the power mix. Electricity demand has been depressed by 20% or more during periods of full lockdown in several countries, as upticks for residential demand are far outweighed by reductions in commercial and industrial operations. For weeks, the shape of demand resembled that of a prolonged Sunday. Demand reductions have lifted the share of renewables in the electricity supply, as their output is largely unaffected by demand. Demand fell for all other sources of electricity, including coal, gas and nuclear power.
Energy Management’s Hannah Robinson takes a look at the latest geopolitical incident to cause an oil price surge.
Background – what happened
On the 14th September 2019, Saudi Arabia was hit by missile attacks on two oil facilities. The attacks were carried out by 18 drones and seven cruise missiles travelling 500km undetected, which proceeded to hit the oil field and processing facility.
The attack caused large fires at the refineries, which according to the Saudi Arabian interior ministry were put out several hours later. The attacks wiped out 5 per cent of the world’s oil supply.
Billions of dollars had been spent on protecting Saudi Arabia against such attacks, including buying in defence systems from the United States, but to no avail on this occasion.
Boris Johnson’s opinion
Prime Minister Johnson agreed with Saudi Arabia in stating that he thought there was a ‘high degree of probability’ that Iran was behind the attacks on the two oil facilities. Johnson also refused to rule out military intervention and stated sanctions may also be a possibility.
“I can tell you that the UK is attributing responsibility with a very high degree of probability to Iran for the Aramco attacks,” he commented. Mr Johnson said he will work with the US and European countries to give a response in an attempt to minimise building tensions.
Mr Johnson is due to meet with presidents from France, Germany and the US to discuss the attacks as well as Brexit, with himself and Trump agreeing there is a need for a united, diplomatic response in regard to Saudi Arabia.
Effect on oil prices
The oil price surge is almost 20 per cent due to the 5.7 million barrels of oil being taken from the supply chain. This is the largest spike since 1988. The price is still below that of last October ($85 dollars a barrel), but by the end of the day of the attack, prices had increased by 14.7%.
Saudi Arabia believes they can get oil production up and running again in a matter of weeks, however, if this doesn’t happen, we could be looking prices hitting the levels of 12 months ago – or higher.
Oil market analysts claim prices could surge towards $100 a barrel in the next few weeks if tensions in the Middle East continue due to renewed disruption in the Strait of Hormuz, a key transit route for the world’s oil tankers.
All eyes will be on Vienna, on June 20-21, as The Organisation of the Petroleum Exporting Countries (OPEC) will host its 7th International Seminar at the Imperial Hofburg Palace.
Discussions between oil industry stakeholders will focus on reinforcing OPEC’s longstanding commitment to strive towards a secure and stable market in support of a healthy global economy.
As things stand, the oil market is anything but stable and this is reflected in energy prices affecting consumers in the UK, which are currently at a level higher than anywhere else in Europe.
In the energy market, there is a direct correlation between oil prices – over $80 a barrel at one stage last month – and the amount business consumers and homeowners pay for their fuel.
The mood in the room in Vienna could play a vital role in helping to calm traders’ nerves and enable the market to weather the “perfect storm” caused by a combination of geopolitical issues, safety concerns and diminished storage supplies, a summary of which can be found below.
So, should businesses stick or twist when it comes to procuring energy before the great and the good of the oil industry convene in the Austrian capital?
For those customers looking to make decisions on future pricing, it’s a tough call. There is more than enough evidence from historic pricing to indicate the current bullish run will come to an end, but the key is determining when.
If talks go well and OPEC agrees to remove some of the current production cuts, then prices, which have enjoyed a brief lull in recent days, could continue to come down. But if that fails to happen, they could easily rise again.
Knowing when to fix a price – and for how long – is one of the key pillars of energy management and we find that a proactive approach pays dividends.
If you would like to talk to one of our energy consultants and get some specialist advice on energy procurement and the other services we offer, please get in touch on, 01225-867722.
The Perfect Storm – why the oil industry has got energy users over a barrel
Red alert: The newly re-elected Venezuelan government appears intent on continuing its path towards a socialist autocracy and therefore runs the risk of reduced foreign investment and the application of stringent economic sanctions. Venezuela is one of the world’s top 10 largest oil producers.
Trumped: After November 4, the US will reimpose sanctions on Iran’s oil exports, as a result of its immediate withdrawal from the Iran nuclear deal. Iran currently contributes roughly 3.8 million of the 98 million barrels of oil produced daily worldwide. Most energy experts say that a revival of American sanctions on banks and other companies that do business with Iran could reduce Iranian production and exports by at least 10 to 15 per cent, and that drop could take six months or more to be felt. Either way, it’s very unsettling for the oil price markets.
Poles apart: Poland’s state-owned oil and natural gas company signed a five-year deal in November to import liquefied natural gas (LNG) from the United States. The deal was signed as Poland and the rest of eastern Europe work to dramatically reduce their dependence on pipeline-delivered gas from Russia. Traders are anxiously waiting by to see how Russia reacts.
Rough times: Continued outage problems with the main North Sea gas pipeline that supplies gas from Norway into the UK are a worry. One shutdown in December, for example, sent oil prices soaring. Falling storage capacity for natural gas has left UK supplies increasingly susceptible to short-term outages, with the shutdown of Centrica’s Rough storage site, the country’s largest facility, making the Uk even more reliant on imports from Norway.
Cracks appearing: Nuclear power is a mainstay of UK power generation, picking up around 20 per cent of the UK’s demand so ongoing safety issues at Hunterston B, and with other plants of a similar age, have been most unwelcome for all concerned. There are even calls for the nuclear reactor’s permanent shutdown due to cracks in the graphite core of the structure.