The US oil trading industry has shocked the world with its jaw-dropping collapse last month amid the coronavirus pandemic. Crashed from US$18 a barrel to negative US$38 in just a few hours, it is the first time in modern history that the oil prices fell below zero, leaving oil traders and investors reeling.
The biggest plunge of global oil prices has triggered a further market collapse when oil producers ran out of spaces to store the oversupply of crude. This has thus propelled oil producers into seeking alternative methods to store crude. One of the immediate solutions is to pay buyers to take the oil barrels they could not store. Recently, oil producers have resorted to storing oil on an ocean-going tanker and yet this method seems to have reached its limit as well.
The negative prices have also caught the oil traders and investors off guard as many are still celebrating the deal between the OPEC oil cartel and the world’s largest oil-producing countries, namely Russia and Saudi Arabia, to stop unhealthy crude wars. Yet, since the collapse, many have thought that the pact to cut oil output by more than 20%, nearly 9.7 million barrels a day in May is “too little too late” to avoid another market crash amid the pandemic, casting a loom over the future of the oil industry.
Reasons behind The Collapse of Oil Prices
The Spreading of Coronavirus Pandemic
Undoubtedly, the on-going coronavirus pandemic is certainly the main mastermind behind the plunging of the oil prices. As the pandemic continues to spread across the world, countries are in lockdown and people are forced to stay indoors. This had majorly disrupted the global demand and supply chains, with the oil industry being the most affected.
However, oil producers, especially in the US, seem to underestimate the effect of the coronavirus pandemic as they continue to pump crude into the global market while the global economy comes to a standstill. This has resulted in the oversupply of oil which in turn put a strain on storage facilities across the world. As such, the wrongly predicted move has triggered the unprecedented market crash.
De-globalisation
Besides the coronavirus pandemic, one of the more direct factors that affect the oil prices is de-globalisation. As the spreading of pandemic forces countries to close their borders and shut down aviation as well as the transportation industry, mobility between cities and countries has been limited. This has effectively diminished the interdependence and integration between countries through limiting cross border trade activities.
Such a decline in the economic trade and investment between countries has indirectly affected the oil prices, as unnoticed by many, oil prices are closely related to the trading industry. When the trading industry is affected, there will be lesser demand on all means of transportation, which translates into lesser demand for oil supply. This has thus caused the oversupply of oil in the global market which then resulted in the sudden plunge of oil prices.
The Winners and Losers of the Falling Oil Prices
The sudden drop in oil prices has caused further damage to the already wounded financial market by affecting the operation of various industries. This has thus changed the dynamic of various industries amid the pandemic.
Loser: The Oil Industry
Of all the industry, it is no doubt that the oil industry will be affected the most. The connection between oil prices and its probability is best reflected in a petroleum company. With the decline in oil prices, oil-producing companies that deal with oil mining will be suffering more than companies that deal with oil refining and distributing. This is because the former is closely tied to the market where their selling price is determined by the market and usually it costs more to produce a barrel of oil than its selling. Thus, the greatest decline in oil prices means that these companies may incur a huge loss. As for the latter, their selling price is usually fixed, thus they should remain fairly stable even with the fall of oil prices amid the pandemic.
Besides that, experts also predict that the emerging oil-producing countries in Southeast Asia, like Indonesia, Malaysia, Thailand and Brunei (Refer to Figure 1), are likely to take a bigger hit as much of their state revenues rely on the gas and oil projects. With the negative global oil prices, these countries are facing a potentially huge profit loss from oil-related revenue, namely petroleum income tax.
Loser: Industrial Company
Besides the oil companies, the industrial company will be affected as well. With the negative oil prices amid the pandemic, many gases and oil projects are halting due to the lack of funding. As such, manufacturers and industrial companies, such as steel and machinery, are feeling the pinch, as they are the supplier for oil-producing companies, providing them with equipment to build and expand the oil-drilling operation.
Winner: Transportation Industry
Unlike the former industries, the transportation industry seems to be benefiting from the huge decline of global oil prices. Unnoticed by many, the transportation industry is closely related to the fluctuation of oil prices. As oil prices decrease below zero, the shipping cost will be lower as cheap oil allows businesses in the transportation industry to have lower operational costs. This will thus indirectly lower the price of goods which in turns attracts more customers as well as increase the trading of goods across borders. However, the spreading of the pandemic seems to limit the benefits that the transportation industry is expected to enjoy with countries still under lockdown and people are forced to stay indoors.
Winner: Renewable Energy Industry
Lastly, another industry that seems to benefit from the historical collapse of global oil prices is the renewable energy industry. As the arch-enemy of the gas and oil industry, it seems that renewable energy has won this time around as the collapse of oil prices has proven the volatility of fossil fuels to build a sustainable and stable economic landscape. Besides that, it has also shed light on the desperation of needing to build a resilient economy based on renewable energy sources beyond the pandemic.
A Ray of Lights in The Glooming Oil Industry
Despite the looming prospect of the oil industry in the next few months, experts are optimistic about its recovery in the second half of the year as the pandemic will slowly recede and restriction on travel will be lifted, which will then propel the demand for oil and fuels. As such, the prospect of the oil industry remains quite positive amid and beyond the pandemic.
To understand more on the outlook of the oil industry and which areas to invest in, one can consult corporate advisors like Desfran. Spearheaded by one of the world’s leading management teams, we stay on top of trends in various markets to offer a wide array of corporate advisory solutions for our partners in pursuing their options for growth. Contact Desfran today to explore your business opportunities in the oil industry now.
References
Oil prices dip below zero as producers forced to pay to dispose of excess, TheGuardian.com
Coronavirus means cheap oil isn’t good news for energy-hungry Southeast Asia, Scmp.com
The trade consequences of the oil price, Voxeu.org
Companies Affected Most by Oil Prices, Investopedia.com
