This week saw the release of the Oil Price Information Service’s (OPIS) first Quarterly Report for the fuel supply and fuel retail market in Australia. The report provides s series of insights relating to the operation of the industry during the March 2020 Quarter and can be downloaded HERE.
The strategic commentary presented in the front of the report has been reproduced below.
“Unprecedented” is arguably the most used word to describe the events that transpired in the opening quarter of 2020 – events that promise to have a lasting impact on people’s individual lives as well as being transformative for the way businesses will operate in the future.
The global petroleum industry, already being altered by climate change, electric vehicles, government regulations, and social pressure to reduce carbon footprints will be transformed by COVID-19, the pandemic virus that rearranged our lives, and the collapse of the oil-exporting alliance between Saudi Arabia and Russia that added additional oil supplies to a market witnessing a record decline in petroleum demand.
The Saudi/Russia Alliance has been repaired via an agreement to cut global oil production 9.7 million b/d for May and June and then review the agreement for the balance of the year. The overall cut could amount to close to 14 million b/d when accounting for production shut-ins in the U.S. and Canada.
The Saudi/Russia Alliance agreement does nothing to solve the short-term oil surplus, but it has widened the gap between cheaper prompt oil prices and those along the forward curve or purchases later in the year.
A premium is not being asked by sellers for barrels to be consigned second half of 2020 as they think oil market supply imbalances will start to be cured over the balance of the year.
So, one step has been taken to help stabilize global oil prices that dropped to levels not seen in two decades during the 1Q2020.
COVID-19 is a bit more complex and it looks like its impact will linger through most of the second quarter, possibly longer. Global “stay at home” orders have damaged oil demand, and some are afraid that even as the virus is contained global petrol demand, especially in the U.S., the world’s biggest market, may never regain the levels seen before. More businesses will accommodate working from home and more households will resort to home deliveries of goods.
What is most ironic about the path of petroleum prices in 1Q2020 is the quarter started with the assassination by the U.S. of an Iranian general that sent prices higher. Oil traders feared it might be the opening volley that could threaten oil supplies in the region where most of the world’s oil is produced. Weeks later COVID-19 crept into the headlines and the high prices seen in January melted to much lower prices by the end of March.
It proved to be a tumultuous quarter: tailwinds from IMO 2020 gave way to an unprecedented fall in oil demand; refinery margins turned negative with petrol trading below the value of crude; producers ended the quarter announcing cuts or outright refinery shutdowns – all after IMO 2020 was expected to usher in a banner year for refining profits.
Inland oil storage and super tanker capacity proved a relief valve to store some of the excess oil, but that sent demand for tanks soaring and supertanker freight rates climbing, increasing the cost of transporting barrels.
Importantly, the dual vice of COVID-19 and Saudi Arabia caused analysts worldwide to reshape their oil price and demand forecasts for the balance of 2020 into 2021.
The flood of crude oil into the market caused benchmark Brent to fall into the 20s and key U.S. and Canadian grades fell below $10/bbl.
Generally, oil analysts don’t see much of a price or demand recovery until the coronavirus is contained and Russia and Saudi Arabia settle their differences. Oil demand was hit hard by the coronavirus, with jet fuel demand suffering the most, followed by petrol consumption. Diesel demand fared better and refining profits for diesel paid most of the bills for producers during the quarter.
Caltex projected Australia jet fuel demand to drop 80%, or higher. Global airlines took drastic measures to reduce operating expenses as they reported daily losses of $50- to $100 million.
American Airlines said at the end of March on a daily basis they were flying about 35,000 customers compared to 650,000 typically!
Petrol retailers in Australia were bracing for petrol demand dropping more than 50% in April, the same levels that were being noticed in the U.S. OPIS exclusive credit card transactional data started to reveal fewer transactions starting in mid-March and accelerating into April.
The consensus, at least for now, is that the biggest demand destruction will take place in the second quarter with a recovery seen in the second half of the year. Most are predicting very little overall growth in global oil demand for 2020 thanks to COVID-19.
Australia retailers did see their cost of product decline during the quarter, but they also saw volumes decline even more. Several told OPIS they were thankful for the stronger gross margins because it was the only thing keeping the station doors open as sales volumes declined.
News in the quarter also focused on potential asset transactions that are reshaping Australia’s retail business. Chevron is acquiring Puma’s assets, for example, and Caltex is being courted by Canada’s Couche Tard and Europe’s EG Group. It is unclear how the sharp decline in global oil markets in terms of prices, demand, and valuations might impact the Caltex transaction.
And one cannot comment on the tumultuous first quarter without acknowledging the severe drop in global equity prices that wiped out trillions of dollars in asset values. Optimistically, Australia, the U.S., China and Asia, Europe, South America – the world – will in time recover from this.
But “unprecedented” capsules a quarter like no other from events that impacted a broader base of businesses across broader regions for a sustained period.
The biggest challenge for the balance of 2020 may not be oil demand and prices. It may be the ability of those unemployed to re-join the workforce as record numbers of people apply for relief.