IEEJ：June 2020 © IEEJ2020

Covid-19 Pandemic: the outlook for oil markets and priceProfessor Paul Stevens
Distinguished Fellow, Chatham House, London
Professor Emeritus, University of Dundee
Distinguished Fellow, Institute of Energy Economics, Japan
Distinguished Fellow, Al Attiyah Foundation, Qatar

IEEJ Live Webinar
June 9th 2020

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Presentation outline: The questions
1. What are the key uncertainties?
o The length of the pandemic?
oBehavioral change: blip or discontinuity?

2. What is the impact of the pandemic?
o Short term – during 2020
oMedium term – 2021-25oLonger term – post 2025

Chatham House | The Royal Institute of International Affairs

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The key uncertainties
o The length of the pandemic?
– Requires an effective, widely available vaccine
o Behavioral change: blip or discontinuity?
– Major behaviour changes largely the result of government
intervention but also voluntary action– Changes in working practices– Concerns over self-sufficiency
Chatham House | The Royal Institute of International Affairs

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SHORT TERM IMPACT• OIL MARKETS PRE-COVID-19 PANDEMICWEEKLY SPOT PRICES 2014-MAY 2020140• OVER-SUPPLY LEGACY OF 2014120

• PRICE WAR – SAUDI VERSUS RUSSIA• INVENTORIES RISING• COVID-19 = LOCK-DOWN AND ECONOMIC COLLAPSE$ PER BARREL• OPEC+ STRUGGLING THEN COLLAPSES

10080WTI60BRENT

40200Stocks excluding SPR of Crude and Products ('000Barrels) 2014-MAY 2020

• OIL DEMAND COLLAPSES• GUESSTIMATES AND DATA ACCURACY?

1450000
1400000
1350000
1300000• PRICE COLLAPSES DRAMATICALLY• FORCES ‘OPEC+ AGREEMENT’ REVIVAL• BUT OVERSUPPLY CONTINUES TO DOMINATE

1250000
1200000
11500001100000
1050000
1000000

Chatham House | The Royal Institute of International Affairs

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MEDIUM TERM IMPACT - DEMAND• LOCK-DOWN = ECONOMIC COLLAPSE: ECONOMETRIC MODELSNOT SUITABLE TO FORECAST

Weekly Europe Brent Spot Price FOB
14012010080• “OECD DISEASE” AND BUDGET DEFECITS60• LOWER CRUDE PRICES VERSUS PRODUCT PRICES?

40200• PROSPECTS FOR TRANSPORT = 60 PERCENT OF LIQUID FUELS• PHYSICAL DISTANCING: PUBLIC TRANSPORT VERSUS CARS?

Jan 03, 2014
Mar 07, 2014
May 09, 2014
Jul 11, 2014
Sep 12, 2014
Nov 14, 2014
Jan 16, 2015
Mar 20, 2015
May 22, 2015
Jul 24, 2015
Sep 25, 2015
Nov 27, 2015
Jan 29, 2016
Apr 01, 2016
Jun 03, 2016
Aug 05, 2016
Oct 07, 2016
Dec 09, 2016
Feb 10, 2017
Apr 14, 2017
Jun 16, 2017
Aug 18, 2017
Oct 20, 2017
Dec 22, 2017
Feb 23, 2018
Apr 27, 2018
Jun 29, 2018
Aug 31, 2018
Nov 02, 2018
Jan 04, 2019
Mar 08, 2019
May 10, 2019
Jul 12, 2019
Sep 13, 2019
Nov 15, 2019
Jan 17, 2020
Mar 20,2020• WILL THE COLLAPSE IN OIL PRICE INCREASE DEMAND?

OECD Disease: Components of the average
price barrel in the OECD

• HOME WORKING?

250• LONG LASTING ECONOMIC RECESSION TRIGGERED?
• STIMULUS PACKAGES VS BUDGET DEFICITS CONSUMER AND
PRECAUTIONARY SAVINGS• SELF SUFFICIENCY AND TRADE WARS?
Chatham House | The Royal Institute of International Affairs

US$/barrel

200150Tax
Industry Margin100

Crude CIF Price
500198420002010

2018

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MEDIUM TERM IMPACT - SUPPLYOIL PRODUCERS – BUDGET DISASTER

Oil budget break-even prices

SERIOUS CONLICT IN MENA, DAMAGING INFRASTRUCTURE?

$ p/bFAILED STATES IN MENA?

IOCs STRUGGLING FINANACIALLYIEA – GLOBAL O&G CAPEX DOWN 33% IN 2020 – US SHALE
DOWN 50%Saudi
ArabiaIraq

UAEAlgeria

2019

CAPEX PLANS FOR THE IOCs$bn

STARVED OF FUNDS

NATURAL DECLINES RATES: WHAT IF DEMANDRECOVERS?

Iran2018

NOCs STRUGGLINGAN IMPENDING SUPPLY CRUNCH?

18016014012010080604020040353025201510502019
2020
2020 REVISED

Source MEES 27 March

Chatham House | The Royal Institute of International Affairs

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MEDIUM TERM -PRICES• OVER SUPPLY WILL CONTINUE TO RESTRAIN CRUDE PRICES• ‘OPEC+ AGREEMENT’ UNRAVELS? = PRICE COMPETITON• PRICE RECOVERY: US TIGHT OIL CREATES A PRICE CAP?
• DEMAND SLOW TO RECOVER GIVEN THE PROSPECTS OF AGLOBAL RECESSION• RENEWABLES ENCOURAGED BECAUSE?
• DRIVE TO NET ZERO CARBON EMISSIONS• SELF-SUFFICIENCY BECOMES A POLICY IMPERATIVE• ENERGY POVERTY MOVES UP THE POLICY AGENDAChatham House | The Royal Institute of International Affairs

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LONGER TERM IMPACTTHE ENERGY TRANSITION CONTINUES?

France primary energyconsumption 1965-1990• CAN BE VERY QUICK IF GOVERNMENTS INTERVENE100%• DRIVE TO NET ZERO WILL SPEED IT UP

90%
80%
70%

WHAT IF THE TRANSITION LOSES MOMENTUM?

60%• POLITICAL WILL = DISTRACTED BY COVID-19?

50%• CHEAPER FOSSIL FUELS –ESPECIALLY GAS?

40%

othernuclear
coal

30%

gasoil20%• FUTURE FOR IOCS?
• DIVERSIFIYING = POOR RECORD – LIMITED ECONOMIC
RENT IN RENEWABLES

10%0%• KEEPING THEIR SHAREHOLDERS ON BOARD
Chatham House | The Royal Institute of International Affairs

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ANY OVERALL CONCLUSIONS?
THERE IS HUGE UNCERTAINTY THAT WILL IMPACT:• INVESTMENT DECISIONS• PRECAUTIONARY SAVINGS
https://www.chathamhouse.org/publication/
geopolitical-implications-future-oil-demand• THE PROGRESS/SPEED OF THE ENERGY TRANSITION• TOGETHER THIS IS BAD NEWS FOR THE OILEXPORTING COUNTRIES WHO HAVE FAILED TO
DIVERSIFY
Chatham House | The Royal Institute of International Affairs

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THANK YOU FOR YOUR ATTENTION

pstevens@chathamhouse.org

Chatham House | The Royal Institute of International Affairs

Contact: report@tky.ieej.or.jp

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