While global oil prices rise after a historic collapse, there is little if any supply or demand indication that the speculative spike is sustainable.
As Big Oil companies’ first quarter (Q1) results start to stream in, it’s just as likely the bad earnings news leads to an even more profound drop into the single digits.
PetroChina and Sinopec both announced troubling pandemic-hit earnings in Q1, deflating certain hopes that China’s super oil majors might help to sustainably lift deflated global oil prices.
PetroChina, China’s largest oil and gas producer, reported a Q1 net loss of 16.2 billion yuan (US$2.29 billion), compared to a profit of 10.3 billion yuan over the same period last year.
The oil major’s Q1 revenue dropped some 14.4%, despite a 4% increase in crude oil production and an 8.7% rise in natural gas output. The company blamed its dismal quarterly results on the coronavirus and a “significant increase in instability and uncertainty.”
Sinopec, China’s largest oil refiner by capacity, reported a Q1 loss of 19.8 billion yuan ($2.8 billion) after a profit of 14.8 billion yuan over the same period a year earlier. Its refinery segment was hit particularly hard, as fuel demand in China collapsed due to Covid-19’s impact.
Both PetroChina’s and Sinopec’s Q1 2020 releases came the same day that global oil markets rallied, at least temporarily shrugging off the gloom and doom of recent trading sessions.
On Wednesday (April 29), global oil benchmark Brent crude rose some 8.5% to $22.80 per barrel. In early trading in Asia on Thursday, Brent nearly hit $25 per barrel.
US oil benchmark West Texas Intermediate (WTI) crude, the world’s most actively traded oil futures contract, had an even better outing, increasing by a whopping 25% at one point on Wednesday before settling at $15.50 per barrel, a 15.5 % increase. Early Thursday, WTI continued its momentum, spiking another 14.5% to $17.15 per barrel.
Both price benchmarks, which have been hyper-sensitive to news headlines over the past two months, reacted to news that Norway, Western Europe’s largest crude producer, agreed to cut oil production by 250,000 barrels per day (bpd) in June, and by 134,000 bpd in the second half of 2020. It represents Norway’s first oil production cut in nearly two decades.
Oil markets, seizing any positive news it could grasp, also trended upward over the two sessions after drug marker Gilead Services said that the results of one of its studies indicated that the Remdesivir drug had a positive effect in treating the coronavirus.
Yet recent the oil price gains are premature and can’t be sustained given the ongoing oil supply and demand imbalance. Moreover, oil prices still haven’t found a floor and thus will likely see more whipsaw price spikes and plunges over the mid-term.
Global oil majors will see both earnings and profits continue to plunge going forward, a trend that will stress their balance sheets, deter new exploration and disrupt existing production, and drive down share prices and dividend payouts. Indeed, it’s not clear to some analysts Big Oil companies will ever regain their past financial and political clout.
For prices to find a floor and then trend upward, more and sustained oil demand is needed, all the while coming amid more oil production shut-ins as producers around the world are increasingly unable to pump so far beneath their breakeven price points.
Oil markets are in uncharted territory amid the worst demand destruction in history and the first global health pandemic in more than a century.
As much as 25-30 million barrels per day (bpd) of demand destruction is projected for April, with oil storage levels precariously close to full capacity, particularly in the US, currently the world’s top oil producer.
US oil stockpiles rose by 15 million barrels to 518.6 million barrels for the week ending April 17, according to the US Energy Information Administration (EIA).
Storage at Cushing, Oklahoma, the largest storage facility in the country after the Strategic Petroleum Reserve, increased around 10% in a week to 59.7 million barrels, about 25 million barrels shy of its capacity.
While US oil inventory levels fill up in May, total global oil storage is projected to be full by June at the latest. The Paris-based International Energy Agency (IEA) reported earlier this month that worldwide crude stocks could rise by as much as 11.9 million bpd in the second quarter of this year.
In Asia, the problem is particularly acute. South Korea, with the fourth-largest commercial storage capacity in Asia, recently ran out of room to store more oil, media outlets reported on Monday. India, the world’s third largest oil importer after China and the US, is also reportedly nearing its storage capacity.
China, the world’s largest oil importer accounting for a massive 10% of global demand, has been seizing the opportunity of multi-year low prices to fill its own strategic and commercial oil reserves. They are expected to reach around 90% capacity by year’s end. Whether actual Chinese demand will return by then is another question altogether.