COVID-19 Impact on Prices of Crude Oil in Chemical and Materials Industry

COVID-19 Impact on Prices of Crude Oil in Chemical and Materials Industry

  • Chemical and Materials
  • Nov 06, 2020

COVID-19 Impact on Prices of Crude Oil in Chemical and Materials Industry

The crude oil prices have been impacted due to rise of Coronavirus (COVID-19) which originated from China and spread almost in every corner of the world. Although taking various preventions and control measures by government of almost every countries and even international securities were maintained, COVID-19 still had a great rate to spread leading to affect almost each and every industry.

Oil and gas industry is one of those having crude oil as its major raw material. Every country is not having crude oil resources for production of products such as petrol, diesel, kerosene, AFT, among others. Major exporters of crude oil include Saudi Arabia, Kuwait, Russia, Iraq, Canada, United States, United States of Emirates, Nigeria among others and these countries are global top player of crude oil.

The crude oil industry basically raises its revenue from its export, COVID-19 affected its demand as its export has been difficult due to complete lockdown and international borders have been sealed for a long time.

Dealing with heavy blow in demand of crude oil to the demand for transport fuels has also been hampered. China being the major consumer of crude oil, the demand from China has gone down as production in all the industry has stopped until the situation improves.

For instance,

  • Global demand of oil was predicted to see its first quarterly decline in approximately ten years tenure, according to the IEA (International Energy Agency), as the COVID-19 spread and wide shutdown of China’s economy has hit the demand for crude oil.
  • The IEA said in its monthly oil market report, demand is predicted to decline by 435,000 b/d (barrels a day) in the first quarter of 2020 and lower than the last year prices of the oil, and marking the first decline in during 10 years.

IMPACT OF COVID-19 ON PRICE OF CRUDE OIL

The emergence of COVID-19 in China in December 2019, and gradual extension of the pandemic all over the world has sharply lower down the demand and price of the crude oil. The prices of crude oil have fallen down to negative because of the lower demand in the market and less availability of storage of the oil which is extracted from the sea.

For a long duration lockdown was enforced in various countries such as Germany, Italy, Italy, India, U.K., Morocco, South Africa and Spain. Coronavirus has driven lockdowns meant people to “stay at home” and elude unnecessary travels. Essentially, COVID-19 has confined all forms of portability therefore oil consumption and demand by the transport sector was bound to fall drastically.

The global energy market demand has declined due to COVID-19 spread, for various products of crude oil such as for oil and natural gas around the world. This decline in oil demand is particularly due to significant decline in the transportation sector, decline in domestic and international travels, and the lockdowns and quarantines in many countries have all reduced the demand for oil.

The recent scenario is facing a sharp fall in domestic consumption and great declines in new investments, in tourism and business travel, due to spill-overs of less demand to other sectors. The economy through production and trade linkages, supply-side chain has led to disruptions in production and trade rate and changes in health care expenditure is one of the channel through which the demand of the oil market is increasing.

Various factors such as excess supply, shrinkage in demand and uncertainty about the future has led to the rapid downfall in oil prices. The lower oil prices are harmful for both the Russian Federation as well as for Saudi Arabia. The cost of production oil for both countries is comparatively low, but their government budgets and exports depend greatly on the revenue generated by oil. In 2020, oil was supposed to be priced at USD 78.30 per barrel for Saudi Arabia to balance the government budget but due to COVID-19 the plans have ceased. The Russian Federation has estimated its breakeven budget point in USD 40 range.

The approximated decline in demand has influenced various agencies to reduce its growth forecast of 2020 by 365,000 barrels a day to 825,000 barrels a day, the lowest since last ten years. The negative impact on oil demand has hit the oil prices heavily since the virus took hold from January, a barrel of Brent crude fallen down by around USD 10 and among others have fallen below USD 55 a barrel.

COVID-19 have impacted the supply chain the most as due to the lock down in the several countries the import and export from different nation become difficult and also the demand have lower down which have impacted the demand of the oil and gases in the market. Several ONG tenders and plant implementation have gone on hold as the market have very less demand of the raw material which are produce by refining the oil.

Plastic resin, PVC resin and other several resins demand have lower down in the developing countries. Transportation of the gases from one industry to another is very difficult due to which demand of gases which are used in several process for manufacturing of finished goods have fallen down and have impacted the gas industry globally.

The recent collapse in oil prices in the global market was caused by a combination of supply and demand issues as well as uncertainty about the future, and has resulted in a crash in financial markets. The following table shows the global consumers of crude oil and the impact COVID-19 had on their economy, demand, consumption rates.

TABLE 1. EFFECT OF COVID-19 IN OIL LEADING COUNTRIES

 

SR. NO.

COUNTRY

CURRENT GDP (BILLION USD)

POPULATION (MILLION)

OIL CONSUMPTION (MBPD) IN 2018

SHARE (%) TOTAL OIL CONSUMED

NUMBER INFECTION

DEATHS

SHARE (%) OF INFECTIONS

SHARE (%) OF DEATHS

1

United States

20554

340

20.46

20.49

85996

1300

15.84

5.34

2

China

13608

1400

13.52

13.55

81894

3296

15.09

13.53

3

India

2719

1353

5.16

5.16

775

20

0.14

0.08

4

Japan

4971

127

3.85

3.86

1387

47

0.26

0.19

5

Saudi Arabia

787

34

3.72

3.73

1012

3.00

0.19

0.01

6

Russia

1658

144

3.23

3.23

1036

3.00

0.19

0.01

7

Brazil

1869

209

3.08

2.09

2985

77

0.55

0.32

8

South Korea

1619

51

2.79

2.8

9332

139

1.72

0.57

9

Canada

1713

37

2.45

2.45

4046

40

0.75

0.16

10

Germany

3948

83

2.32

2.32

47278

281

8.71

1.15

11

Iran

600

82

1.88

1.88

32332

2378

5.96

9.76

12

Mexico

1221

126

1.81

1.81

585

8.00

0.11

0.03

13

Indonesia

1024

260

1.79

1.79

1046

87

0.19

0.36

14

UK

2855

66

1.62

1.62

11816

580

2.18

2.38

15

France

2778

67

1.61

1.61

29581

1698

5.45

6.97

16

Thailand

505

69

1.48

1.48

1136

5.00

0.21

0.02

17

Singapore

364

6.00

1.45

1.45

683

2.00

0.13

0.01

18

Spain

1419

47

1.34

1.34

57786

4365

10.65

17.92

19

Italy

2084

61

1.25

1.25

80589

8215

14.85

33.72

20

Australia

455

9.00

1.09

1.1

3143

13

0.58

0.05

21

Taiwan

589

23

1.07

1.08

267

2.00

0.05

0.01

22

Turkey

771

82

1.00

1.00

3629

75

0.67

0.31

 

Total

68119

4676

77.97

78.09

458334

22634

84.44

92.91

 

Rest of the World

17800

3124

21.87

21.91

84444

1727

15.56

7.09

 

Grand Total

85919

7800

99.84

100.00

542778

14361

100.00

100.00

PRICE OF CRUDE OIL

The below given standards are used as benchmarks for crude oil from different regions of the world:

  • Brent Crude: The Brent crude contributes to roughly two-thirds of all crude around the world, making it the most widely used marker of all and used as standard for various other types. “Brent” crude actually refers to oil extracted from four different regions in the North Sea that is Forties, Brent, Oseberg, and Ekofisk. The crude from this region is sweet and light in nature, making them efficient for the extraction of diesel, gasoline, and other high-demand products.
  • West Texas Intermediate (WTI): The WTI refers to the oil extracted from the wells in the U.S (North America) region. The product is very light (in terms of molecular weight) and very sweet (in terms of sulphur content), making it in particular ideal and efficient for gasoline refining.
  • Dubai/ Oman crude: This Middle Eastern crude is a useful for oil having slightly lower grade than WTI or Brent crude.

The price of Brent crude oil stated by international benchmark was approximated to be USD 64 per barrel (b) in 2019, USD 7/b and lower than average of 2018. The price of West Texas Intermediate (WTI) crude oil marked by the U.S. benchmark was approximated to be USD 57/b in 2019, USD 7/b lower than in 2018. While comparing the prices of recent years to past prices, the crude oil prices are traded within relatively lower price than the price ranges throughout the past year. Brent prices reached an annual daily low of nearly USD 55/b in January, rising to a daily high of nearly USD 75/b in late April. The significant lower range is estimated to be USD 20/b since 2003. WTI prices lie in range from USD 47/b to USD 66/b.

In the global economy, the Indian Oil & Gas (O&G) industry contributes almost 5.2 percent of global oil production and is among the top three big markets in terms of demand growth and ranks 4th in refining capacity worldwide, which is 249 MTPA).

India being import dependent, having oil and gas imports rates at 84% and 53% respectively of their respective annual demands. Therefore due to influence of COVID-19, either due to the wide-spread demand destruction or due to the downfall of crude prices is of great concern for the Indian O&G industry.

COMPANIES STRATERGIC INITIATIVES DURING COVID-19

  • Leading OPEC (Organization of the Petroleum Exporting Countries) producers of Saudi Arabia and Abu Dhabi, decides to increase output capacity while on the other hand cutting the prices which will give big consumers such as manufacturing sector the chance to fill up at lower cost.
  • ISPRL (Indian Strategic Petroleum Reserves Limited), a company being in charge of fabricating strategic storage by entering for signed memorandum of understanding (MOU) with the UAE's national oil company ADNOC (Abu Dhabi National Oil Company) for the lease of half of its 2.5 million tons Padur facility for the storage of the crude oil, for later usage when demand increases.
  • The ISPRL (Indian Strategic Petroleum Reserves Limited) has leased about half of 1.5 million ton capacity located in Mangalore storage to ADNOC, which has used it to store about 5.5 million barrels of Das oil in the cavern, while ISPRL has used the remaining capacity of storage.
  • India has filled 1.03 million tons Vizag facility with Basra oil from Iraq another OPEC (Organization of the Petroleum Exporting Countries) producer.

STEPS TAKEN BY GOVERNMENT FOR THE PRICE CONTROL OF CRUDE OIL

  • Saudi Arabia has to planed enact new legislation, which will result in thrice increased in value added tax (VAT) rate as the COVID-19 and oil prices started to impact the economy negatively. Saudi Arabia's finance minister, Mohammad al-Jadaan, has declared that Saudi Arabia will raise the rate of VAT from 5 % to 15% as of 1 July 2020 and will also abolish the cost of living allowance that is being provided to state employees as of 1 June 2020.
  • In South Dakota, government has signed a bill which widens the meaning of infrastructure to include effectively any utility, gas or oil equipment and also increased the charges for causing interruption, disturbances or impairment of such facilities to violation.

CONCLUSION

As more crude oil producer are in Middle east and Africa in Saudi Arabia and the United Arab Emirates are the leading producers which have face many problems due to lower demand of the crude oil in the developing nations. In the pandemic situation import and export, flow of goods has become very difficult even the demand have fallen down due to which the prices of the crude oil have fallen down.

Developing countries have also faced the problem of the storage of crude oil as the demand was less which lead to increasing storage capacity demand which increases the cost of the produces which resulting into the down fall in the global oil and gas industry.

 

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