Opinion

Coronavirus outbreak tests shale before it tests OPEC

Coronavirus outbreak tests shale before it tests OPEC

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With four years of experience in reaching consensus among the members of the OPEC+ group of oil exporters, it is not hard to imagine that group extending or deepening such cuts to mitigate the impact of the coronavirus outbreak impact on the global economy.

This was clear during the extraordinary meeting of the OPEC Joint Technical Committee (JTC), which agreed to proceed with an additional adjustment taking into account that China is the world’s largest oil importer and has the second largest refining capacity in the world.

As always, global oil markets and the world depend completely on OPEC to fix any supply and demand turbulence. 

Though some analysts called for an earlier OPEC meeting ahead of March 5, it is more prudent to wait for the market to absorb the actual likely impact on global oil inventories before coming to an ultimate decision ahead of next month’s meeting.

Perhaps of more interest is whether US shale producers will survive the price slump after the WTI grade dipped to $50 per barrel. The coronavirus is helping to make 2020 a particularly tough year for shale producers.

They have failed to capture further market share through contractual volumes because their growth has not been sustainable.

In fact, average US crude oil exports for 2019 did not surpass 3 million bpd.

Neither have we seen US shale oil being able to compensate for any supply shortages as refiners only buy it on a spot basis with hefty discounts. 

Despite the expected increase in new pipeline capacity from the Permian Basin, the 2020 non-OPEC supply forecast remains subject to numerous uncertainties, including oil prices, investment discipline, hedging, cost inflation, unplanned outages, delayed start-ups and maintenance.

Even before WTI fell to $50 per barrel, US shale producers were cutting spending for the second year in a row as they responded to investor demand to maintain strict capital expenditure discipline. 

This has caused US oil production growth to slow down, and such growth will continue to slow, as investor demands for discipline persist. Thus, it is very questionable if US shale oil output growth will exceed one million barrels per day as forecast early by the Paris-based International Energy Agency.

US shale faces an extremely tough year, regardless of prices. Although the industry continues to evolve and remains extremely difficult to forecast, risks are now weighted to the downside.

The key mathematics of US shale oil growth have become more challenging, partly because of the rapid growth achieved in 2018. 

Decline rates for existing wells have risen, and production growth means that the month-to-month decline is applied across a higher base. 

As the active drilling rig count rapidly declines, it is impossible for US oil production to sustain an upward momentum. 

 

Faisal Faeq is an energy and oil marketing adviser. He was formerly with OPEC and Saudi Aramco. Twitter:@faisalfaeq

Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view

China virus causes first drop in oil use in a decade: IEA

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Local residents wearing protective face masks amid fears coronavirus pass containers of petrol across a checkpoint in Vietnam. (AFP)
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A scanning and transmission electron microscope image of coronavirus released by the National Institute of Allergy and Infectious Diseases' (NIAID) Rocky Mountains Laboratories (RML). (NIAID-RML)
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Updated 15 February 2020

China virus causes first drop in oil use in a decade: IEA

  • Global demand ‘hit hard’ as contagion forces widespread shutdown of Chinese economy, says report

PARIS: Global oil demand will suffer its first quarterly drop in a decade as the COVID-19 virus lashes the economy in China and its impact ripples throughout the world, the IEA said.

“Global oil demand has been hit hard by the novel coronavirus (COVID-19) and the widespread shutdown of China’s economy,” the International Energy Agency said in its latest monthly report.

“Demand is now expected to fall by 435,000 barrels year-on-year in the first quarter of 2020, the first quarterly contraction in more than 10 years” when it dropped during the global economic crisis, it added.

While the IEA still expects demand for oil to grow for this year as the outbreak is contained, it slashed its forecast for the increase in global consumption by nearly a third to 825,000 barrels per day, the smallest increase since 2011.

The outbreak of the new coronavirus spurred China to take drastic measures such as placing in quarantine over a dozen cities and extending the Lunar New Year holidays in order to try to stem its spread, nearly shutting down key parts of its economy.

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Although markets have rebounded in recent days as investors grew confident that China could quickly contain the virus and its economic impact would be short lived, the IEA warned against complacency by comparing today’s crisis to the 2003 SARS outbreak.

“While steps taken in China to reduce its spread were adopted earlier than in the SARS crisis and have been far more extensive, the profound transformation of the world economy since 2003 means China’s slowdown today is bound to have a stronger global impact,” it said in the report.

The IEA noted that since 2003 China has become more integrated in global supply chains, its tourism sector has dramatically expanded and Chinese are the largest contingent of world tourists, and the country’s share of global GDP has jumped from 4 to 16 percent.

With it estimating that China’s international air travel having fallen by 70 percent and domestic travel by half in the early part of the crisis, the IEA expects double digit drops in jet fuel demand in the country.

A similar drop in diesel demand is expected due to other travel restrictions.

The IEA chopped its forecast for China’s GDP growth in the first quarter of this year by 1.5 percentage points to 4.5 percent. It also made large cuts of over 0.5 percentage points to its forecasts for China’s trading partners in the region, as well as the US and Russia.

The IEA doesn’t forecast changes in oil prices, but said consumers were unlikely to get much of a boost from cheaper petrol and diesel at the end of the day.

“The effect of the Covid-19 crisis on the wider economy means that it will be difficult for consumers to feel the benefit of lower oil prices,” it said.

With China being a big consumer of oil and the source of most of the growth in oil demand in recent years, the crisis will have a major impact on oil producers.

At the end of last year, OPEC and its allies including Russia, called OPEC+, agreed to further cuts in oil production in order to compensate for rising production in the US and avoid excess supplies that would depress prices.

They are now considering an additional cut of 600,000 barrels per day to compensate for the drop in demand due to COVID-19.

The IEA estimates that the demand for OPEC crude has dropped from 29.4 million barrels per day (mbd) in the final quarter of 2019 to 27.2 mbd in the first three months of this year.

It noted that this is 1.7 mbd below what what OPEC produced in January when the new production cuts came into force.


Nissan’s new CEO willing to be fired if no turnaround at Japanese giant

Updated 18 February 2020

Nissan’s new CEO willing to be fired if no turnaround at Japanese giant

  • Makoto Uchida, who took over the top job in December, put his job on the line at the automaker’s shareholders’ meeting
  • Uchida pleaded with shareholders to be patient while he comes up with a plan by May to recover from crumbling profits

YOKOHAMA: Nissan’s new chief executive said on Tuesday he would accept being fired if he fails to turn around Japan’s second biggest automaker which is grappling with plunging sales in the aftermath of the scandal surrounding ex-chairman Carlos Ghosn.
Makoto Uchida, who took over the top job in December, put his job on the line at the automaker’s shareholders’ meeting, where he faced demands ranging from cutting executive pay to offering a bounty to bring Ghosn back to Japan after he fled to Lebanon.
Nissan’s worsening performance has heaped pressure on Uchida, formerly Nissan’s China chief who became its third CEO since September, to come up with aggressive steps to revive the company.
On Tuesday, Uchida, who was repeatedly heckled by shareholders, said he was ready to face dismissal if he failed to improve profitability at the company, which is on course to post its worst annual operating profit in 11 years.
“We will make sure that we steer the company in an effective way so that it is visible in the eyes of viewers. I will commit to this: if the circumstances remain uncertain you can fire me immediately,” he said.
Uchida, 53, did not give a timeframe for improving Nissan’s performance.
The new boss must prove to the board he can accelerate cost-cutting and rebuild profits at the 86-year-old Japanese giant, and that he has the right strategy to repair its partnership with France’s Renault, sources have told Reuters.
Uchida pleaded with shareholders to be patient while he comes up with a plan by May to recover from crumbling profits and a corporate shake-up following Ghosn’s arrest in Japan in late 2018 over financial misconduct charges.
“If you can be patient a little bit longer, on a day-to-day basis you will be able to sense we are changing,” he said.
Ahead of the meeting, some shareholders demanded more clarity about Uchida’s plan.
“I just want to know what the plan for recovery is. At the moment, the share price has dropped again, and the value of the company has plummeted,” said a 70-year-old former employee who owns shares in the company.
“If this is the situation, part of me thinks that we would be better off with Ghosn ... If we don’t get a clearer vision of the path the company is taking, it will be a worry.”
Nissan’s shares are trading around their lowest level in more than a decade following its latest earnings.
Last week, Nissan cut its dividend outlook to its lowest since the 2011 financial year, after dwindling car sales drove the company to post its first quarterly net loss in nearly a decade.
Shareholders gathered at the extraordinary meeting in Yokohama to vote in new directors including Uchida and Chief Operating Officer Ashwani Gupta.
Their appointments highlight a changing of the guard at Nissan, as shareholders were also voting on motions for former company stalwarts, CEO Hiroto Saikawa and COO Yashuhiro Yamauchi, to leave their board director positions.