NEW DELHI: The world’s oil exporters have managed to hammer out a historic output cut deal over the weekend after diving crude rates forced Saudi Arabia and Russia to set aside a bruising price war. But, viruses aren't so easily cowed.
Oil market experts say that as large and unprecedented as the 9.7 million barrels per day (mbpd) cut is, it pales in significance to the demand destruction wrought by the COVID-19 pandemic. Lockdowns to contain its spread have choked off mass transport and industrial activity across the world.
Even though oil producers not part of the Saudi Arabia-Russia led OPEC+, like the US, have agreed to make voluntary cuts, this is unlikely to make up for the drastic fall in demand. India's 21-day lockdown, for instance, has already resulted in domestic transportation fuel demand falling by over 60 per cent so far in April.
"... no voluntary cuts could be large enough to offset the 19 mbpd average April-May (global) demand loss due to the coronavirus," Goldman Sachs analysts observed in a research note.
Brent crude trends on Monday reflect the market's lack of enthusiasm for the cut, with demand concerns wiping out all gains from a brief early spike after the deal's announcement to over $32 per barrel. As of 6 pm IST, Brent was see-sawing between the $30-31 range it has maintained over the past week, down by a whopping 56 per cent from its peak of $71.75 on January 8 this year.
Warren Patterson, Head of Commodities Strategy at ING, believes that Brent prices are likely to average at just $25 per barrel between April-June this year. While a potential demand recovery during the latter half of 2020 may bring prices up to $50 a barrel by the end of 2020, it depends on how long the pandemic and the resultant lockdowns last, he noted.
"If travel restrictions and country lockdowns continue into the second half of 2020, this would likely slow the demand recovery expected for the latter part of this year," he said.
Little gain for India
While rock-bottom crude oil prices are generally a bonanza for an oil guzzler like India, which imports nearly 80 per cent of its requirement, the impact of the pandemic is likely to wipe out much of these gains.
The 50 per cent fall in crude rates since January only led to a 10 per cent cut in retail fuel rates in India, as companies have sought to factor in the Centre's Rs 3 per litre excise duty hike. But, with retail demand tanking over 60 per cent during the lockdown, the government's collections from the duty hike are likely to be limited.
According to Edelweiss Securities, compared to the 1.1 per cent boost to GDP India received from falling crude prices in 2014-16, the current plunge is likely to offer a "tailwind" of just 0.1-0.2 per cent of GDP. State-owned blue-chip oil marketing firms (OMCs) are also set to take a beating due to abysmal sales combined with high inventory losses, while low oil prices are expected to impact oil producers like ONGC and Oil India worse.
Kotak Securities analysts say that OMCs' EBITDA is already set to slip deep into the red during the quarter ended March 31, with EBITDA losses of Rs 1,320 crore for BPCL, Rs 610 crore for IOCL and Rs 62 crore for HPCL in the quarter.