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We have to learn to expect the unexpected

By Andrew Bradshaw, Fifth Ring

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Andrew Bradshaw is made to look foolish over his predictions as a row between Russia and Saudis sees oil price plummet during coronavirus crisis

Any predictions over oil and gas have a tendency to quickly go up in smoke.
Any predictions over oil and gas have a tendency to quickly go up in smoke.

At noon on March 4 I gave an internal company presentation on what I thought the future of the energy industry might look like into the middle of this century.

I began the presentation by pointing out that forecasters and analysts can very often be proven wrong and leave themselves open to ridicule and the potential to look foolish with the benefit of hindsight. But I offered out my best guess based on the data at the time.

I talked about a potential flat lining of oil demand in the 2040s and a tail-off thereafter. I talked about relative stability in the oil price, the possible end of the cyclical peaks and troughs that have marked the oil industry since the very early days. I suggested oil would be in the $50 to $70 range for the foreseeable future.

Some 50 hours later I’d been proved right. I was made to look foolish.

As for the presentation – it was as out of date as if it had been written five years previously, not five days.

Why was this? Round about 2pm on March 6 we started getting news that a meeting between OPEC and Russia in Vienna had collapsed and the two main parties – Saudi Arabia and Russia – had stormed away from the negotiating table.

With coronavirus spreading and demand for oil declining due to reduced travel, the meeting had been held to explore the possibility of further production cuts by the OPEC+ cartel to support falling oil prices.

The energy industry is never dull at the best of times

Frustrated at the habitual tendency of the US shale players to fill the oversupply gap whenever Russia and OPEC reduced their own output, and smarting from US sanctions over Rosneft’s operations in Venezuela, the Russians decided they would cut no more.

The production-cutting agreement which had lasted more than a year was off. In response, the Saudis declared they would open the taps and increase production from April. The Russians declared a supply free for all.

The shock of this news sent the oil price tumbling. The decision to pump more oil into the world’s stocks when fewer people wanted it seemed to outsiders like utter madness. It was oil’s interpretation of the ending to the film Thelma and Louise. Both Saudi Arabia and Russia were driving off a cliff. In economic terms it was mutually assured destruction.

As a result, we saw oil prices for Brent crude plummet from around $65 in January to $23 at the end of March. Some US oil grades were cheaper per barrel than a pint of beer. We also saw Donald Trump intervene to bring the two sides back round the table. That immediately led to a 20 per cent increase in oil futures, but at the time of writing the impact of the President’s intervention was unclear.

What does all this mean? A webinar I attended in early April, which used $30 as a revised base average price for 2020, suggested a significant reduction in projects sanctioned in the North Sea with a fall off in capital expenditure. I would suspect this scenario would be replicated elsewhere in the world.

In terms of the energy transition, there are conflicting arguments.

One is that with oil at such a low price, consumers will be tempted to retain or revert to the tried and tested traditional fuels of diesel and petrol, which could delay the drive towards the adoption of “greener” liquid energy sources such as biofuels and low sulphur, along with hydrogen and renewable energy.

On the opposite side, the fall off in demand for oil may be exactly the right time to press home the energy transition. This is supported by suggestions that at $35 per barrel or lower, investor returns on renewables projects can compete with those from oil.

The energy industry is never dull at the best of times. Right now the situation seems to be changing by the day and in some cases by the hour.

I could stick my neck out once again and suggest that when (if) we become free from coronavirus and travel restrictions are lifted, we will see an upsurge in mobility unprecedented in modern times as people all over the world make up for the time spent indoors. That would likely create a surge in demand for oil and possibly a peak before we came back possibly to where we were in January/February at around $55-$65 per barrel.

However, my previous predictions have taught me that, for now at least, it’s better to expect the unexpected.

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