Oil Investments Are Drying Up As Crude

Demand Falters
By Irina Slav - Oct 29, 2020, 7:00 PM CDT
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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 AlaskaMeanwhile, 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