12 Jun 2020

What Does the Future Hold for the Oil and Gas Industry?

Oil extract location
 

The oil and gas industry hasn’t had an easy run over the past years. 

In 2019 it suffered from ongoing reports that the market was plummeting due to the adoption of sustainable energy resources. And heightened regulations from governing bodies didn’t help the industry to overcome these obstacles. 

Of course, 2020 has seen a brand new, completely unforeseen challenge for the oil and gas industry with the worldwide pandemic of Covid-19.

We’re going to analyze the situation in two parts: 

What’s happening right now in the oil and gas market?
What does the future look like?

Let’s take a look.

PART ONE: What’s happening right now?

It’s fair to say that so far, the outlook has been bleak. 

The IEA’s Oil Market Report 2020 shows that the demand in April was 29 mb/d lower than a year ago, down to a level last seen in 1995. 

And according to the Financial Times, Oil supply is expected to fall to a nine-year low this month, the International Energy Agency said, as global producers make big cuts to offset a record collapse in demand.

We know that the low prices of oil will threaten the stability of the oil industry. An industry that’s central to the functioning of the global economy. Even with the demand falling by a record amount this year, oil companies still face the challenges of investing to offset natural production declines and to meet future growth. 

PART TWO: What does the future look like? 

Taking a look at the IEA’s oil report from March 2020, we can see that the global capital expenditure by exploration and production companies in 2020 is forecast to drop by about 32% versus 2019, to $335 billion. This the lowest level for 13 years. 

However, it’s predicted that the global demand for oil will increase by 5.7 mb/d over the 2020-25 period at an average annual rate of 950 kb/d. 

Admittedly, this is a sharp reduction on the 1.5 mb/d annual pace seen in the past 10 year period. 

But it’s estimated that the oil industry will recover after a difficult start in 2020, with growth rebounding to 2.1 mb/d in 2021.

For 2Q20, demand is expected to be 23.1 mb/d below year-ago levels. The recovery in 2H20 will be gradual, in December it’s predicted that the demand will still be down 2.7 mb/d year on year. 

Rebalance Attempts Underway

Policymakers are responding to the crisis with radical steps. 

Governments have introduced massive emergency fiscal plans to support workers and businesses. And likewise, the main central banks have set in motion huge monetary stimulus programs. 

The report suggests that major consumers and producers have to come together to have a positive impact on market stability. An extraordinary meeting of energy ministers from G20 and other countries took place on Friday 10 April 2020. Those present offered their support for the efforts of the OPEC+ countries to stabilize the oil market.

While efforts won’t rebalance the market right away, lowering, there’s a forecast of a gradual recovery picking up from June (although demand will still be 15 mb/d lower than last year. This pick up could have the potential to address the stock build-up problem, as we move into the second half of a (hopefully) less tumultuous 2020. 

Conclusion

There are big measures in place to securing the future of the oil industry in these difficult times. 

The IEA said the drop in oil demand this year, although the biggest fall ever, would not be as severe as initially thought, it warned that a resurgence of outbreaks was a risk to a “gradual-but-fragile” recovery.