Henry Berry, director of Tristone Holdings Ltd, shares his thoughts on how investment in the oil and gas industry will recover after the COVID-19 pandemic
The pandemic has led to the energy market being more volatile than ever. With the demand for oil and gas crashing as the world went into lockdown, the impact this has had on investment has been unprecedented. Since the results for the upstream market’s first-quarter have been published, it has been predicted that global spending will have decreased by nearly 30%, compared to 2019. This has brought a drop of $156 billion to the lowest it has been for 15 years.
Further to this, in April, the US’ crude oil prices sank to below $0 for the first time in history. However, with the demand for oil and gas starting to see a slight return as the restrictions of the lockdown gradually lessen across the world, it’s necessary to consider how the investment in this sector will recover. The resilience of the oil and gas sector has been proven many times before.
Henry Berry – director of asset-backed IPO company, Tristone Holdings Ltd, believes that the industry will be able to bounce back in the not too distant future. Henry has been keeping a close eye on the volatile marketplace and has shared his thoughts on the industry’s recovery with Open Access Government.
The current situation
Signs of regrowth can already be seen within the industry. It seems the worst could be over, and we are now working our way down the road to recovery. This certainly doesn’t mean that the recovery will be rapid, however, but global production cuts have done an awful lot to keep things manageable for the time being. Earlier this month, a decision was made by OPEC (Organization of the Petroleum Exporting Countries) to continue their diminished product output. This decision was made despite their previous statement that they would seek to reinstate more ‘normal’ levels of production beyond June.
With this in mind, it is clear that a cautious and considered approach will most likely be the way in which the industry emerges from the pandemic in a position of strength. There are definite positives to be seen in the long-term health of the oil industry, such as the gradual incline of the prices of both West Texas Intermediate and Brent.
To summarise the current situation, Henry states, “the volatility of oil has been greatly impacted by the recent circumstances of the global pandemic. The variables which normally dictate the ebb and flow of the market prices are changing at such a rate that it is highly noticeable in the daily rise and fall of the market price.”
China’s economic and industrial resurgence has certainly inspired a great deal of hope and optimism. Chinese crude oil imports even went so far as to reach an all-time high over May, a month in which a staggering 11.34 million barrels of crude oil were imported per day. Although this remarkable comeback hasn’t been enough to sway OPEC’s third-quarter production guidelines, it will undoubtedly encourage other key producers, such as Russia, to maintain their hope that restrictions will soon be cut and pre-pandemic production levels (or something close to) will be reinstated.
It is worth remembering, however, that wider global conditions may still have an effect on China’s seemingly strong position. Should a second wave of the COVID-19 outbreak impact China, it is likely that demand may fall once more.
In discussing the potential for a second wave and the further effects it may have on the industry, Henry states, “This scenario is not your classic case of what makes markets move, but it does highlight the classic peak and trough model normally set in motion by weather, war, and politics to name a few examples.” So, despite any likelihood of oil prices rising only to drop again, they will invariably go on to rise once more.
Carefully considered expectations
The shadow cast by the global behaviour of the virus will undoubtedly hold answers to the future of the market in the immediate-term, as one will always mirror the other. If a second wave of the virus were to attack, then all industries, including the oil sector, will have no choice but to slow production once more.
Recovering to pre-pandemic levels of market strength will be an uphill battle, and significant improvement shouldn’t be expected anytime soon. The meaning of ‘soon’ in this context is currently being fiercely debated by those in the industry. Some believe it could be at the end of this year; some believe it will be closer to the end of 2021; but the main issue here is that examining the situation through a pre-pandemic lens, with no consideration over the scale of the pandemic, is incredibly naive.
In regards to what we can expect post-pandemic, Henry states, “whilst the industry races to influence the balance of supply and demand, these drastic measures and events will spark a chain reaction which will eventually see an undersupply as everyday people start returning to work, eating out at reopened restaurants and travelling as soon as they feel safe enough to go on their holidays. Spending months on end in the confinement of your own home would likely see a spike in people venturing out with their friends and family.”
As we haven’t before seen a global situation like this, we cannot truly understand the repercussions until they happen, let alone compare them to any pre-existing disaster, such as 2008’s financial crash. Instead of attempting to predict the unpredictable, we must instead appreciate the enormity of the situation, as well as the tentative steps towards recovery taken by the market, which has proven before to be intensely resilient.
Overall, considering the persistent threat of the virus, an inherently risk-based industry has no option but to put itself at even greater risk. Regardless of this, however, it’s important to note how well the industry continues to cope, and that alone should be the foundation of many people’s optimism. Further to this, investors should not be put off. Indeed, now is arguably an excellent time to invest whilst prices are still relatively low. Whilst the sector’s recovery may be a bit of a bumpy road, prices will undoubtedly continue to rise in the medium to long-term.