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Analysts Foresee Record Drop in Oil Demand as COVID-19 Crisis, Fossil Price War Deepen

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With the fossil price collapse continuing, oil falling below US$30 per barrel, and Saudi Arabia vowing to continue forcing prices down through May, analysts are predicting a “low and slow” recovery for the industry.

Yesterday, Reuters reported that the economic slowdown triggered by the coronavirus pandemic, combined with the continuing, epic oil price war between Saudi Arabia and Russia, had pushed benchmark Brent crude down to $29.49, its lowest threshold since 2016, and West Texas Intermediate to $28.23. Brent is the standard for setting the selling price for oil in Europe and much of the rest of the world, while West Texas plays the same role for North America.

On Monday, Bloomberg said the global fight against the coronavirus was “set to trigger the most severe contraction in annual oil demand” in the industry’s history. “Forecasts for global oil use are being cut dramatically as government measures to contain the spread of the pandemic restrict the movement of people and throw supply chains into chaos,” the news agency explained.

“Global financial markets are being rattled by the growing severity of the coronavirus and at the same time spooked by the enormity of the stimulus measures to combat it,” said Vandana Hari, founder of Singapore-based Vanda Insights. “If the pandemic continues to worsen across the globe, oil will head lower. If it worsens in the U.S., belt up for an apocalypse.”

As of Tuesday evening, the latest word from the U.S. was that 100 people had died from the virus, and researchers believed social distancing measures would be needed for at least three months as “the only viable strategy at the current time”. White House press secretary Stephanie Grisham and departing chief of staff Mick Mulvaney were in self-quarantine, New York Mayor Bill de Blasio was telling citizens to prepare for a “shelter-in-place” order, and Donald Trump—who spent months and wasted valuable time mocking the virus and claiming it would “disappear” like a “miracle”—now maintains he “always viewed” coronavirus as a “pandemic long before it was called a pandemic”.

Meanwhile, “oil traders, executives, hedge fund managers, and consultants are revising down their estimates for global oil demand,” Bloomberg said. “Travel restrictions across the globe tightened further over the weekend, with the U.S. extending its travel ban to include Britain and Ireland. Australia said anyone entering the country must self-isolate for two weeks, Spain imposed a lockdown, and France closed cafés and restaurants.” Those and other measures were expected to “hammer demand for gasoline”, while industrial output in China was falling farther than analysts previously expected—both pointing to prices so low the majority of fossils lose money on every barrel they produce.

Yet Saudi Aramco is “very comfortable” that it can meet its shareholders’ expectations at $30 per barrel, CFO Khalid al-Dabbagh said earlier this week. “In a nutshell, Saudi Aramco can sustain the very low price and can sustain it for a long time,” CEO Amin Nasser added Monday. “For the production in May,” he told an earnings call with investors and analysts, “I doubt it would be any different from next month.”

The combination of cratering demand and low prices—as well as broader market shifts in favour of renewable energy—have industry observers predicting a slow, limited recovery for oil and gas. “We believe oil prices will not bottom until the fourth quarter of 2020 or first quarter of 2021, particularly in view of the weaker demand outlook caused by the COVID-19 outbreak,” Bank of Nova Scotia energy analyst Paul Cheng told a conference call on Wednesday.

“The broader market signals are pointing away from fossil fuels and toward renewables and other fossil fuel replacement strategies,” the Institute for Energy Economics and Financial Analysis added last week. “These signals should make it clear that, even if oil prices eventually recover some lost ground, the next growth area is not in the fossil fuel sector.”

IEEFA’s assessment shows oil and gas sector strategies in disarray, colossal fossils’ investment plans “now up in the air”, the economic chain supporting petrochemical and plastics production undercut by unstable markets, and the economic risks of fossil fuel lock-in on full display.

“The volatility of the past three days has destroyed what used to pass for conventional wisdom,” wrote IEEFA analysts Tom Sanzillo, Melissa Brown, and Tim Buckley. “The high-cost infrastructure needed to service fossil fuel imports—grids, ports, gasification terminals, rails, and pipelines—takes decades to pay off. These investments make no sense when fuel price volatility can whipsaw markets and wreck even the biggest energy companies. By contrast, renewables can insulate Asia’s high-growth economies from fossil fuel price volatility.”

Which means that, “yes, fossil fuel interests will continue their talk of an ‘if only’ rebound: if only the flu would go away, if only interest rates would stabilize, if only oil and gas prices would rise, if only climate and environmental regulations would disappear, if only U.S. shale producers would become disciplined.”

But all of those hopes and dreams run headlong into a one glaring truth: “Fossil fuel development is too expensive for this economic epoch.”

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