Staring down the barrel of an uncertain future
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A few months is a long time in oil markets.  In late February 2020, the attention of oil-industry analysts and investors was fixed firmly on the supply side of the market, with all eyes on the growing power struggle between Saudi Arabia and Russia over the appropriate response to an increasingly over-supplied market as the COVID-19 pandemic cut into oil demand in China - the world's second largest consumer and the biggest source of global demand growth.

In early March, tensions boiled over when Russia refused to co-operate with other members of the so-called OPEC+ group of oil producers in a renewed round of output cuts, thereby prompting Saudi Arabia to increase supply and slash its export prices in a move designed to re-established its hegemony as the world's largest oil producer.

The market reaction the Saudi move was swift and violent, with crude oil prices dropping by over 30% on 9 March 2020, their second-largest one-day drop ever (Bloomberg).  By this time, however, the impact of the pandemic was no longer restricted to China in particular, or even Asia more generally, but had spread to Europe and North America.

As lockdowns took hold across much of the world over the second half of March and early April, the focus of industry analysts and investors switched to the demand side and the unprecedented drop in oil consumption being experienced.

In June 2020, after the convulsions of the previous three months and with the world starting to emerge from lockdown, the big question for investors is where does this leave the outlook for the oil industry in general and the oil majors in particular?

Our view is that the peak in global oil demand may already have been seen in 2019, and that even is this is not the case, market expectations of when the peak will happen have been brought forward by the impact of the pandemic and the behavioural changes in response to it.

If so, this could prompt significant structural changes on the supply side going forward, with Saudi Arabia in particular likely to think hard about how best to maximize the value of the cheapest and most abundant oil reserves that lie under its sands in future.


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