Economic Impact of COVID-19 on Global Oil Industry

Coronavirus epidemics has a significant impact on the global oil industry as the crude oil price has declined significantly in a short time, which resulting declining share prices of oil companies. A wide range of energy markets, such as renewables, coal, and gas, has been affected by the coronavirus crisis. However, its effect on oil industry is severe as it is stopping people and goods to move from one country to another, which leads to a reduction in the demand for transport fuels. The demand for oil has significantly affected by the reduction in air travel. 

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As the government across the globe stopped or reduced international travelling due to the epidemic of coronavirus, there is less consumption of kerosene, which in turn, results in the reduction in the oil demand. The reduction in demand led to concerns of excess supply of oil products, which thereby resulting decline in prices. As per the International Energy Agency (IEA), in 2020, the global oil demand stands at 99.9 million barrels a day, declined nearly 90,000 barrels a day from 2019. This is a sharp decline from the forecast by IEA in February, where it has anticipated that the global oil demand would grow by 825,000 barrels a day in 2020. 

The war in oil price commenced with a reduction in demand and supply in China. China is the largest consumer of energy across the globe. The country accounted for over 80% of the global oil demand growth in 2019. In addition, the rising production of shale oil in the US increased the OPEC challenges to manage oil prices. Therefore, OPEC plans output cut to support oil prices. It has agreed to cut the oil supply by 1.5 million barrels per day until June. In OPEC countries, Russia is the major oil-producing nation than any other member nation, including Saudi Arabia. 

Russia disagreed to join OPEC’s plan to cut oil supplies. Saudi Aramco has also come in response to Russia’s refusal to join OPEC plan to cut oil supply. In April, Saudi Aramco will boost its crude production by more than 10 million barrels per day, after the collapse of supply cut agreement of OPEC with Russia. It may have a strategy of supporting prices and grab market share. The company aims to leverage its oil production and sell more crude oil to protect its market share.

Price cuts and higher production by Saudi Aramco is expected to push global prices down further, which will hurt countries relied on oil exports for foreign exchange and tax income, primarily in South America, Africa, and south-east Asia. The short-term effect of the coronavirus outbreak in the oil market will eventually depend on governments efforts to combat the effect of the condition. The coronavirus effect on oil markets may be temporary, however, it may have long-term challenges for global oil suppliers, primarily those significantly rely on oil and gas revenues.