Weak global demand weighs heavily on oil producers

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Weak Global Demand Weighs on Oil Producers

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Contingent on its global demand, the price of oil is set to struggle for the remainder of the calendar year 2020, as forecasted by both Organization of the Petroleum Exporting Countries (OPEC) and the US Energy Information Administration (EIA). 2020 has been tumultuous for the world’s most traded commodity, highlighted by an infamous collapse of West Texas Intermediate (WTI) May contract, to -$37 USD per barrel in April.

For the remainder of 2020 OPEC has forecasted the impact of the COVID-19 pandemic to hurt the demand for Oil harder than expected. OPEC Forecasts have reduced global demand by 9.5 million barrels a day, a 9.5 per cent year-on-year fall from 2019.  This figure comes off the back of a worse than previously predicated fall in Global growth, now set at -4.1 per cent.

OPEC’s latest report revealed, “the impact of Covid-19 related developments on already fragile global economic conditions remain challenging and will require coordinated global policy action from all market participants.”

In a similar fashion, the EIA also released its oil forecasts, predicting that the consumption of petroleum and other liquid fuels will average 93million b/d in 2020. This is a significant 8.3 million fall from 2019 levels. In 2021 demand is forecasted to pick up rising a further 6.5 million from the 2020 average. Currently WTI is trading at $37.25 within the $35-43 band it has remained since mid-May, while Brent is poised at $39.59. Both have pulled back in recent weeks due to rising uncertainty.

Looking closer to home, Oil Search (ASX: OSH) is Australia’s largest on shore oil producer with 69,00sq km acreage in the Cooper Basin with plans for expansion. The company recorded record production for the FY20 period however experienced a -264 per cent in profits and has forecasted cuts to capital expenditure and staff alongside bringing new resources online sooner.

 Meanwhile, Beach Energy (ASX: BPT) is engaged in both oil and gas exploration, operating across Australia New Zealand, the United States, Egypt, Tanzania and Papua New Guinea. Beach Energy revealed in its FY20 results a net profit after tax of $501 million alongside a positive cash balance of $50 million. The company provided guidance for production to fall between the range of 26-28.5 MMboe and underlying earnings before interest, tax, depreciation, and appreciation to come in at $900-$1,000 million. As a result of its high margins, no significant write downs, and declaration of a FY20 dividend, Beach Energy therefore finds itself in an excellent position moving into a period of uncertainty.

With the global supply of oil around the world has remaining elevated and dampened forecasts for future demand, investors remain wary of where equilibrium will be positioned in this uncertain environment.

Caroline Wong

Caroline Wong is a Research Analyst at KOSEC – Kodari Securities. She writes on markets and focuses on ASX Top 300 companies. Email Caroline at c.wong@kosec.com.au.

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