Drilling through a broken oil market, repercussions for our local market

International Brent Crude plummeted momentarily on Tuesday, 21^st April, the lowest since 21 years ago but recovers a day after to hover around $20 a barrel. As the novel Coronavirus lockdown grind down many facets of our lives i.e. a grounded airline industry, a drowning hospitality sector, a quandary health industry, a crumpled supply chain industry, etc.

The energy industry is not an exemption as the lockdown spurt through the world’s largest economies, leaving the market swamped by cratering demand and unmanageable oversupply. Crude oil price plunged by 54.18% on average terms, starting the year on a high of $66.74 to close the first quarter of 2020 by $30.58 a barrel. According to the IEA, consumption is expected to crush by 29 million barrels per day. The ballooning supply glut is further collapsing oil futures and its market structure as the world grapple for an evaporating storage capacity.

Sunday, 12^th of April, 2020 saw a virtual gathering of the world’s biggest oil producers, in unprecedented and enthusiastic bid to salvage the global oil market by agreeing a historic production adjustments. Historic because of the volume of the cut and also the duration, as the production cuts are expected to last for two years. However the ambitious deal intended to rescue the broken oil market that was claimed to be championed by U.S President Donald Trump has been brushed off by the unprecedented and thunderous plummeting of the US Shale’s May futures falling below zero on Monday, 20^th April, due to low liquidity and limited available storage capacity. US shale is traded in America Benchmark – West Texas Intermediate (WTI) while we in Ghana concern ourselves with International Benchmark – Brent Crude.

According IEA, partial or total lockdowns are in force in 187 countries and territories, and although they are different in scope, activity in the transportation sector has fallen dramatically almost everywhere. IEA expect that global oil demand in 2020 will fall by 9.3 million per day (mb/d) versus, erasing a decade of growth. It is worthy to note that an estimated 60% of global oil demand is used in the transport sector and with about 3 billion people in lockdown; the demand for the black gold is terribly low.

The price war recently witnessed between Saudi Arabia and Russia, has also exacerbated the current crisis of ballooning and unmanageable oversupply. Russia resistance to deeper oil production cuts proposal by OPEC led Saudi Arabia during OPEC 178^TH extraordinary meeting has led flooding of the market with crude oil with a collapsing demand and an overwhelmed storage capacity. As different conspiracy theorists advance various reasons for the price war, i.e. an indirect attempt to collapse U.S Shale Industry, to drive prices low to kill a thriving Renewable industry, retaliation by Russia because of Trump’s sanctions on Nordstream, Rosneft Trading, for Saudis to establish themselves as a market leader, etc, theorists fell short to project a broken energy market that may never recover it demand prospects ever again.

While US Shale companies file for bankruptcy and other oil majors such as Royal Dutch Shell Plc, Italy’s Eni SpA, Norway’s Equinor ASA and French major Total SA are taking prompt steps to augment their financial strength and resilience by reducing spending, investment, freezing recruitments and terminating their share buyback strategies.

African countries are facing triple blow of loss of revenue, loss of investment and loss of market share due to collapsing oil prices as result of cratering demand, supply glut and dwindling storage capacity. The plummeting oil prices is not only making it extremely difficult for oil producing African countries to raise the needed petroleum receipts to help combat the novel Coronavirus but driving away investment by big oil majors in oil prospecting and development as well as ceding of market shares to other foreign countries with cheaper crude prices due to relatively low production cost.

Ghana is not immune to the devastating impact of the destruction of crude oil consumption as we have seen our projected petroleum receipts for 2020 shredded into pieces. With our benchmark pegged above $62 a barrel at the beginning of the year, prices of International Benchmark – Brent Crude is currently languishing around $20 per barrel, a whopping 70% reduction in our benchmark.

As government mourns drastic reduction in its petroleum revenue, we have to wipe our tears as the institution mandated to hold our strategic reserve is unable to acquire and store crude products for the future benefits of Ghanaians. The Bulk Oil Storage and Transportation Company Limited – BOST, due to poor management, improper planning, lack of efficiency, illogical sequencing of policies, etc in recent times are unable to fully take advantage of current happenings on the global oil market unlike other countries like China, America etc that are buying cheap products to fill their strategic reserves.

Restrictions in movement has also taken devastating toll on Oil Marketing Companies (OMCs) as their sale has taken thunderous hit of 70% from an average sale volume of 5000 before lockdown to an average sale volume of 1500. Some of the Oil Market Companies are virtually wallowing in debts as they have to borrow to lift products as well as pay their mandatory tax to Ghana Revenue Authority on any lift.

On the local market, there has been a 15% average reduction for the consumers in the first quarter of 2020. While this is modest relief to the, trotro drivers, commuters, market women, farmers etc, it is worthy to note that a stable market is more desirable to a volatile market. Stable oil market ensures thriving companies on supply chain of the local oil market, providing essential services to consumers, providing employments, contributing to government’s revenue basket.

As the world continue to battle Covid-19 and witness historic turbulence in the crude oil market, it is very important for oil producing countries (OPEC & NON – OPEC Members) to consider a more deeper cut sooner than later while world strategic reserves are made available to absorb some of the excess barrels on the market. Locally, government must begin to have a conversation around providing relief packages for OMCs in terms of extending the duration of payment of tax by OMCs after they lift crude products.

We are indeed in extraordinary times, kindly stay at home to save lives and save your community. If it becomes necessary to step out, please wear your nose masks, observe all the social distancing and health protocols. I leave you with one of my favourite verses in the bible – “Have I not commanded you? Be strong & courageous. Do not be afraid; do not be discouraged, for the Lord your God will be with you wherever you go.” Joshua 1:9.

By Raymond Nuworkpor

The writer is a research and policy analyst at the Institute of Energy Security

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