The oil industry was walloped by the COVID-19 pandemic, and the effects are lasting, impacting the current oil prices and forcing companies to limit their production. The oil industry is now reducing its oil production as the world is reducing its oil consumption. The novel coronavirus has put much of the world on lockdown, limiting peoples’ movements. With fewer people on the roads and in the skies, less oil is needed, and more stress is put on the oil industry.
The pandemic has reduced, and in many cases eliminated, travel and commutes, which has brought the demand for energy to a new low. In response, the industry has lowered the cost of a barrel of oil to levels we haven’t seen for an entire generation.
Tension and Price War Amid Pandemic
Tensions in the oil industry are also increasingly high because of the oil price war. Russia and Saudi Arabia entered a price war in 2020 after Saudi Arabia approached Russia in early 2020 to reduce oil production and keep prices at a more moderate level. Oil demand had already started to drop because of the pandemic, and Saudi Arabia was responding. Russia, however, refused to play along.
The conflict resulted in significant drops in oil prices throughout spring 2020, leading to the price becoming negative on April 20th. How is the price in the negative? Oil production cannot be stopped entirely, which leads to continually greater supply than demand. The oil industry has nowhere to store the excess oil and is now to the point that it will pay for the oil to be taken away.
Experts are warning that if the excessively low prices continue, we could see a wave of bankruptcies across the industry. On top of that, the share prices of the biggest players in the industry have halved during the crisis, and stock prices of smaller outfits have fallen more.
The pandemic is having a significant impact on the industry, which begs the question:
Should refineries continue to operate?
The answer isn’t as easy as it might seem. As said earlier, it’s impossible to stop production altogether. However, some refineries in various areas of the world have already shuttered in the wake of decreased demand — refineries in India and Europe shut down in late March. Italy’s Ancona refinery stopped production when Italy enacted a country-wide lockdown, and in India, the top refiners started shutting down their entire plants in March.
In the US, several refineries have slowed or cut production, including in California and Texas. Exxon’s Baytown, Texas plant, the largest refinery in the US, shut down a gasoline-making unit as national fuel demands plummeted. On April 15th, Marathon Petroleum Corp. began shutting down its Gallup, New Mexico refinery, making Gallup the first US facility to shut down entirely due to the pandemic.
Unfortunately, Gallup is likely not the last refinery to close. Major companies like Valero Energy Corp. and Phillips 66 have already lowered their production to be at or near minimum levels. The companys’ storage tanks are filling too quickly with the oil they cannot sell. Minimum production levels differ from plant to plant but are typically around 60% or 65% of capacity. Anything below minimum forces the facility to idle, which might be the best situation for some refineries.
As storage tanks continue to fill to maximum capacity, and the demand for oil continues to stay lower than usual, many refineries will have no choice but to go into idle mode. The current negative oil prices are directly related to full storage tanks and the hesitance to stop production.
As of early April, US refiners were processing the lowest amount of crude since 2011, which is equal to a loss of 3.5 million barrels a day. Unfortunately, for refiners, this might not be enough as, since early March, fuel demand has hit a loss of 7 million barrels a day.
Possible Future Outlook
The good news for oil producers is that some parts of the world, including several states in the US, have started to reopen their economies. This is a sign that demand will begin increasing, even if it is a slow process. The US Energy Information Administration’s monthly Short-Term Energy Outlook forecasts a 2020 average of $33 per barrel, recovering to $46 per barrel in 2021. While this is promising for an industry bounce-back, the prices are still lower than in 2019 when the average price of a barrel was $64.
If the projections are correct, things will start to look up for the oil industry. When lockdowns come down, and people return to work, oil demand will increase. Refineries can sell their stockpiles and start ramping up production again.The decision to close depends on individual companies and refineries. There is no one answer that applies to all plants. Where a shutdown might behoove one refinery, it can be a death sentence for another