Duel between Covid-19 and oil prices continues

By now I am sure Kenyans appreciate the relationship between Covid-19, oil demands and prices. Reduced social and economic activities and travel restrictions have constrained petroleum products intakes across the world including Kenya. And we have seen the petroleum regulator, the Energy and Petroleum Regulatory Authority (EPRA) reduce petroleum retail prices to levels lower than when Covid-19 arrived in mid-March. Covid-19 prevalence, especially in high GDP nations like USA, China and European Union, has become a good calibrator of oil price movements.

In the past month, many developed countries experienced reduced levels of the virus and reasoned that it was time to permit gradual opening of their economies. Armed with the good news of economic revival prospects, the oil market speculators talked up the prices with Brent crude prices going from below $30 per barrel in April to about $43 early last week. And EPRA announced higher pump prices in June to reflect the latest outcome of the duel between Covid-19 and oil markets.

A number of countries that let go their “stay-home” restrictions, are now seeing excited citizens carelessly dropping their defenses, with Covid-19 surging back with a vengeance. Specifically, USA is having to roll back plans to re-open the economy. Oil markets fear of virus resurgence and reduced oil demands has in the past few days seen a reversal of oil price recovery, which are now heading back to $40, and with indications that prices could drop further depending on how the virus resurges in the US.

The ongoing virus/oil market plays demonstrate the uncertainties leaders across the world have to contend with when deciding how to navigate the virus predicament. I must give credit to the Kenyan authorities for the great caution that they have so far exhibited in evaluating and deciding defensive measures against the virus. Long term, and considering all the unknowns, it is better in terms of lives and economy for Kenya to play the game on the side of informed caution.

Avoiding potential runaway virus escalation into the counties, is worth the sacrifices we make today, to avert high socio-economic costs of a full blown escalation across the rural Kenya. It is not easy for our President who has to make the final call. In the meantime, let us analyse and learn from good and bad decisions by various countries. Experts are saying that Corona will be with us for many years to come, and this is why we should not be in a rush to make decisions that we regret later.

There is a consensus among major oil players that a “return to normal” oil demand will take longer than previously anticipated, with the low oil demands and prices not expected to recover to pre-March levels until after 2021. Changed lifestyles and travel patterns and reduced incomes are permanently reducing oil demands which will take long to recover.

Aviation fuel demands will remain low, as national and international flights are expected to recover only slowly as travel caution takes hold. Teleworking and teleconferencing will also be expected to reduce need for business travel.

The Covid-19 is playing a major havoc on nearly all oil industry supply chain players. Large and small oil producing companies have declared job reductions; dividends and capex have been reduced or postponed; high cost oil producing assets abandoned; while mergers and acquisitions have become rare. Right here in Kenya we witnessed a lower-tier independent oil explorer Tullow Oil declare a Covid-19 justified force majeure on its contractual obligations with the government

Oil producing countries heavily dependent on oil for national budgets are having to scale back their economic ambitions and public service levels, while some of them are digging deeply into their sovereign wealth funds

It is the economic performance of the two largest economies (USA and China) that determines how and when global oil demands and prices move.

While the Chinese economy and oil demands are slowly mending, mainly due to disciplined Corona recovery strategies, the same cannot be said about USA which has evidently failed to implement a correctly coordinated war against the virus.

This essentially makes the US virus prevalence the critical determinant of global oil price levels.