Oil & Gas Challenges (1)
The Oil and Gas Industry in the US faces some very tough challenges. Slow economic growth along with the spread of Corona virus in many countries around the world, seems to be the most important factor impacting oil prices and production for US players.
GDP Growth Slows Down
- According to the latest publications, the US GDP growth will slow in 2020. Deloitte predicts a 25% recession, while the Federal Open Market Committee stated a growth of 2% in 2020, 0.2% less than in 2019. This causes uncertainty for the US fuel market. As growth rates downshift, there is a lower demand for oil, considering that oil is a product used widely in modern life.
- With other big markets facing economic instability, the demand for oil has been reduced and therefore oil prices have been declined as well. This creates a vicious circle, since the impact to the US companies is massive, with numerous US oil companies going bankrupt in 2019
- US oil production has not been affected, as the country wants to maintain the same volumes of oil production. On the other hand, due to the economic circumstances and taking into account the declining oil prices, the big challenge is to manage to get the product to the markets, especially abroad as US is a big oil and gas exporter.
Corona Virus Affects Oil Prices And Demand
- The spread of the virus that started in Asia affects negatively the oil and gas industry in two different ways. First and foremost, people travel less since they are scared of the contagious virus. This means flight cancellations and reduced number of flights, especially to Asia. With a lesser amount of fuel used for aircrafts, demand for oil has declined. Secondly, without knowing how this will end and for how long it will exist, stock markets have been plagued and this has also an impact on oil demand as well.
- First effect of the corona virus has been the projected oil consumption decline by approximately 600-800,000 barrels per day over Quarter 1, as it was stated from the Barclays' press release.
- Price of oil falls as the global demand declines. China is the second biggest market for oil consumption globally, after US. The outbreak of the virus had a significant impact on global demand.
- This concerning health issue had also an impact on the shares of big players. Exxon Mobil experienced the lowest price in the last fifteen years with its share to close at $49.82 within February 2020.
- Lower oil prices will push back the whole U.S. economy. As fuel prices decline, oil companies tend to reduce investment and cut down jobs. That was the case back in 2016, when there was big decline in gasoline prices that largely contributed to the country’s economic growth slowing from 2.9% in 2015 to 1.6%.
- In addition, Brent prices were the lowest comparing to the past twelve months. West Texas Intermediate, the most significant oil-price grade, used as a benchmark in oil pricing, stated a fall to $48.73 a barrel in February 2020, recording the lowest price since January 2019.
Limited Access To Financial Help Affects US Oil Players
- With oil prices declining, there is instability in the cash flow of the oil companies, while at the same time, they face pressures in terms of profitability. As a result, major banks have cut access to oil players in the US market. This has created a massive problem mainly to the smaller oil companies that operate primarily in the US and are struggling to get financial help. This could result to more oil companies crashing financially.
- Industry experts expect companies operating in natural-gas to be the most threatened.
- Lower oil prices affect the whole business structure of the companies being present in the sector. With US prices declining both in 2019 and in 2020, this has led to job cuts and reserved debts.
- For instance, Halliburton stated few months ago in October 2019, that if oil prices remain at a low level, they will implement more cost cuts.
- Additionally, other big shale producers such as EOG Resources and Pioneer Natural Resources Co, had predicted a share loss by the end of 2019, comparing to the per share earnings in 2018.
IMO 2020 Shakes The Oil And Gas Industry
- From 1st of January 2020, the International Maritime Organization (IMO) has implemented a new law that forces a 0.50% global sulphur cap for marine fuels, instead of the previous limit of 3.50%S, radically changing the shipping market supply.
- This will boost costs for consumers' products. In addition, under these conditions, the new demand for a more compliant fuel is expected to increase also ULSD prices and consequently the cost of diesel fuel.
- There is uncertainty and confusion across the industry, as not all the oil companies were ready for this change, while major oil players such as BP and Shell stated that they have limited production of sulphur fuels that meets the IMO 2020 standards.