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Friday , October 23 2020

Barrel price of $40 is not sustainable

Industry needs an overall review to face world economy

The recent results of major international oil companies revealed a loss of more than $9 billion in the second quarter of this year for ExxonMobil and Chevron. This is two quarters of big losses in a row when compared to their profits of $7.1 billion for the same quarter last year.

Kamel Al-Harami

The results will be the same for other oil companies without exception, but of course with less amounts due to their sizes. Its market value in the international bourse is on a decline too, signaling a new trend of perhaps moving away from oil in pursuit for the environmentallyfriendlier options. The low crude oil production of OPEC-Plus is due to the COVID- 19 pandemic and the consequent fall in demand especially with people staying at home and reduced consumption of oil and gas.

This is particularly prevalent in the transportation sector of aviation gasoline and marine consumption, which has led to cuts in daily usage by more than 20 million barrels. The recovery is not much forthcoming, causing losses of volumes and income mainly for the oil producers as well as the international oil companies. Slashing and reducing costs with more emphasis on manpower is one of the solutions, if not the easiest one, and is applicable to all industries and commercial activities. However, such a resolution is not the solution, as all governments will have to print more cash to pay for the millions out of work.

Our oil industry needs an overall review to face the world economy following the disappearance of COVID- 19 after a cure is found. Strangely enough, despite all the advanced medical technologies globally, we still have failed in finding a cure to treat COVID-19.

Perhaps the oil industry, like the rest of the world economy, will have to suffer for some time; just like us who are locked down with zero activity and getting used to the culture of working from home perhaps well into next year too.

Oil producing countries must follow the practices of oil companies and reduce their expenses in order to deal with the low oil revenues which dropped by more than $20 per barrel or 33% when compared to the hypothetical number to show low deficits between $55-$60 per barrel. The real number that most oil producing countries need in order to balance their budget must be between $80 to more than $200 a barrel for Iran and Venezuela. We are all indeed in need of some sort of a miracle.

Meanwhile, the demand has fallen by more than ten million barrels per day. The danger of course is that the oil prices must rise above $40 in order to encourage oil companies to invest and spend more capital to search for and discover new oils.

At today’s oil prices, none of them will do anything until the oil prices move upward. This will certainly take time. We are going to face hard times like the rest of the world. The only good news is that this situation is shared by every country. For our long-term future, we must think outside the barrel. This option does not seem feasible with our financial reserve still staying full.

By Kamel Al-Harami Independent Oil Analyst

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