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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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Oil Investments Are Drying Up As Crude Demand Falters

Thirty-five percent: this is the size of the spending cuts oil and gas companies are likely to have made this year in response to the effects that the coronavirus pandemic is having on demand, according to the International Energy Agency. And this is just the spending slump in upstream oil and gas. This is just part of a wider trend of investment cuts in the energy industry, according to the IEA, which earlier this month published an update of its World Energy Investment report, first released in late spring. At the time, some thought we were seeing the worst of the pandemic. They were, apparently, wrong.

Demand for oil has certainly improved in some parts of the world, notably in Asia, where governments have been more successful in containing the spread of the coronavirus than their counterparts in Europe and North and South America. But even in China—the world’s oil demand recovery driver—the rebound is slowing down. After all, even though its domestic demand may be improving, if regional and global demand is stalling, this will have a negative effect on China as well.

According to the IEA, the impact that the pandemic is having on investments in the oil industry will continue to be felt for years to come. This is hardly surprising: the agency noted a 45-percent cut in investments by U.S. shale oil companies this year, combined with a 50-percent jump in financing costs. The number of active drilling rigs in the U.S. may be rising, suggesting the beginning of a recovery, but the total was still down 564 rigs on the year as of last week, so that recovery will take a while.

Related: Washington Greenlights Conoco Oil Project In Alaska Meanwhile, fuel stock updates from the Energy Information Administration are offering mixed signals: last week, for instance, saw a major drawdown in distillate fuel stocks, which should be good news suggesting demand for distillates is improving. The problem is that it is likely that this improvement is a temporary occurrence rather than a trend. Air travel is still greatly constrained, and the chances of any change in the status quo are slim.

Uncertainty: this is the keyword for not just the oil industry but for all others affected by the pandemic to such a grave extent as to force changes in business models. Europe’s Big Oil majors are doing just that with their push into renewables and plan to greatly reduce the contribution of their core business to overall earnings. U.S. majors are sticking with oil, and they may well have a good reason to do it.

There has been a lot of government and activist talk about a green recovery from the pandemic crisis. But the pandemic is still raging, and not only is it not abating, but it is gathering strength. This would mean more money needed for stimulus measures. This, in turn, would mean less money to spend on renewables, because despite the celebrated cost declines in solar and wind, financial and regulatory support from governments remains essential for their increased deployment.

Related: Hedge Funds Boost Bullish Oil Bets

The future remains marred in uncertainty that extends to the possibility of a rebound in oil investments. According to some, such as BP, we are already past peak oil demand, so that would mean less investment in oil production growth globally. Others, such as OPEC producers, hope things will sooner or later return to normal, and the world’s appetite for more oil will continue to grow for at least a few more years before plateauing. And yet even OPEC is preparing for a worst-case scenario.

The extended cartel OPEC+ is considering a delay in the next relaxation of oil production cuts, from January 2021 to April, in response to the latest trends in Covid-19 infections. One thing seems relatively clear, however. The longer the surge in new infections continues, the longer it would take the industry to return on the path of recovery and growth.

By Irina Slav for Oilprice.com

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  • Pekka Lehtikoski on October 29 2020 said:
    Yes, uncertainty is certainly the word today. It looks like the virus will be here at least for much of 2021. It is difficult to guess how people and governments will react to that. Many are fatigued with lockdowns, and people and governments are running out of "money" for the lack of a better word. On the other hand, the virus is serious, and very much so for the elderly, and attempt to protect people from virus continues. So even the virus will be here, we don't know to which extent the economy will continue to be restricted and how much people will self isolate.

    It looks like the oil industry will continue to be hit, for now. Global fossil fuel investments dropped almost 30% to $690 billion in 2020, while the hit on renewables was much smaller, down to $320 billion.

    Guessing anything about 2021 oil prices is, in my opinion, so uncertain that it is pointless. Oil production capacity is being driven down. Some oil companies may or may not go bankrupt. On a timeline of several years, I think people still want to cool and heat their houses, drive cars, and have agriculture/trucking running. Eventually, demand and supply will meet and find balance.
    On the still longer timeline of many decades, transformation to renewables may start having a significant impact, which exceeds energy demand growth, and fossil fuels consequently will start permanent decline.
  • Mamdouh Salameh on October 30 2020 said:
    Sooner or later there will be effective anti-COVID vaccines and the pandemic will be history like the Ebola and Sars viruses before it.

    Newton’s third law:”for every action, there is an equal and opposite reaction” holds true for oil investment and global oil demand. The larger the decline in oil investments and oil demand the bigger the rebound.

    Furthermore, global oil demand and oil investments aren’t falling because the fundamentals are weakening but because of the continued pandemic. Remove the cause, things will rebound to business as usual.

    Anybody who thinks otherwise is hallucinating. There will neither be a post-oil era nor a peak oil demand throughout the 21st century and probably far beyond. The global economy will continue to run on oil and gas well into the future.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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