Oil industry might benefit from modest temporary price spike

Oil&Gas Materials 19 May 2020 11:30 (UTC +04:00)
Oil industry might benefit from modest temporary price spike

BAKU, Azerbaijan, May 19

By Leman Zeynalova – Trend:

Oil industry might benefit from the modest temporary price spike, Trend reports citing McKinsey & Company, an American management consulting firm.

“Under most best-case scenarios, oil prices could recover in 2021 or 2022 to precrisis levels of $50/bbl to $60/bbl. Crude price differentials in this period are also likely to present both challenges and opportunities. The industry might even benefit from a modest temporary price spike, as today’s massive decline in investment results in tomorrow’s spot shortages,” the company said in its report.

In two other scenarios the company modeled, those price levels might not be reached until 2024.

“In a downside case, oil prices might not return to levels of the past. In any case, oil is in for some challenging times in the next few years,” reads the report.

Mckinsey estimates that demand for refined products is down at least 20 percent, and has plunged refining into crisis.

“We think it will be two years at least before demand recovers, with the outlook for jet fuel particularly bleak.The immediate effects are already staggering: companies must figure out how to operate safely as infection spreads and how to deal with full storage, prices falling below cash costs for some operators, and capital markets closing for all but the largest players,” reads the report.

Looking out beyond today’s crisis toward the late 2030s, the macro-environment is set to become even more challenging, according to the company.

“We expect growth in demand for hydrocarbons, particularly oil, to peak in the 2030s, and then begin a slow decline. Excess capacity in refining will be exposed, putting downward pressure on profits—driven by marginal pricing and, in some cases outside the growing non-OECD2 demand markets, by the economics of some refiners that seek to avoid the high cost of closing assets,” reads the report.

The upstream cost curve will likely stay flat, Mckinsey believes.

“While geopolitical risks will continue to be a major factor affecting supply, new sources of low-cost, short-cycle supply will reduce the amplitude and duration of price fly-ups. The battered shale oil and gas subsector will nonetheless continue to provide supply that can be rapidly brought onstream. Its resilience might even improve as larger, stronger players consolidate the sector. Declining demand, driven by the energy transition, and global oversupply will make the task of OPEC and OPEC++ harder rather than easier,” said the company.


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