Market Moves: A look at the changing world of post-pandemic oil markets

Amidst growing awareness of climate change and environmental impact, the markets are banking on sustainability, with investors increasingly channeling their capital into renewables.

But transition takes time, and even in the midst of uncertain economic climates, and the shift towards more sustainable fuel sources, the biggest downstream players, like are still heavily reliant on their fossil fuels business. Operators such as ExxonMobil and Royal Dutch Shell still invest tens of billions of dollars every year, just to maintain current business continuity.

Asian Downstream Insights investigates this crossroads in the oil and gas pricing market, navigating market moves and regulators, and why downstream operators and investors should prepare themselves now for the changing tide of the energy transition.

All eyes on OPEC

Intergovernmental bodies, regulators, and governments themselves are public sector pillars influencing private sector change. Standing shoulders above the rest for the downstream industry is OPEC, the Organization of the Petroleum Exporting Countries whose 13-member countries hold 79.4% of the world’s proven oil reserves and produce around 40% of the world’s oil output. And just as the actions of OPEC can sway the moves of the market, so too can oil price activity influence OPEC initiatives. This January, the body made a record curb to oil output by 9.7 million barrels a day, around 10% of global output, to support prices plummeting on the back of the global pandemic. Now, as vaccine rollouts across the world signal light at the end of the tunnel, the continuation of these production curbs continued to push prices even higher.

Yet, as recovery continues safety nets may slip away. Just this March, as OPEC Secretary General Mohammad Barkindo noted that “the outlook for oil demand was looking more positive, particularly in Asia”, and at a meeting of the organisation and its allies – a conglomeration known as ‘OPEC +’ – discussions were expected to centre round easing of the curbs and last year’s deep supply cuts.

In anticipation, prices rapidly plunged, as demand remains volatile. But speculative markets can be hard to hedge bets on. In February, despite its comparatively quick coronavirus recovery, China’s factory activity dipped to its lowest point in nine months, which could curtail crude demand and oil purchase by the world’s top importer.

“There are signs that the physical market is not as tight as futures markets suggest,” came a warning from ING Economics.

Investing in a green economy

Sustainability is a buzzword that’s here to stay, and as government policies and stakeholder scrutiny mount, fossil fuel companies are among the most exposed to this green growth. Even before the pandemic, there were concerns over how the transition towards cleaner fuels could impact long-term refinery margins and oil prices.

Yet as the global health crisis forced accelerated innovation, downstream operators are finding ways to diversify. In Asia, Malaysia’s Petroliam Nasional Bhd (PETRONAS) was the first to commit to a 2050 net zero emissions targets. They were followed closely by major global players, including BP, Shell and Total. As ESG becomes an increasingly critical consideration for investors, venturing into renewables is a savvy way for next-generation leaders to shake the stigma of environmentally unfriendly fuels, expand into new revenue streams and boost investment and share price as they bolster their ESG credentials from an already solid foundation of the sector’s rigorous HSE approach.

Value of the virtual refinery

Downstream 4.0 has arrived, and with it comes greater transparency, for oil and gas operations, and for pricing. As predictive analytics technologies evolve, they could provide operators, and market forecasters to analyse and assess the oil and gas market’s current – and future – activity, by integrating not only historical data, but also external structured data sources, such as market fluctuations, weather, and geopolitical events. As we enter the age of the virtual refinery, new technologies are not only making an impact on business performance, they are also impacting downstream’s business worth.

Act now, to diversify later

As the world resets, the market moves. And for downstream, the journey may be a gradual seismic shift, marked by many fluctuations along the way. The increasing interest in renewables may signal a declining investment in fossil fuels, and a long-term peak, then drop, of oil demand – and price – but it will take time to deploy alternative energy on a global scale. Downstream operators who act now will be in prime position to diversify and evolve along with the changing tide of the market.

“The industry has permanently changed, at least for the next several years,” predicts Michael Cohen, chief US economist at BP.

In the meantime, continuing oil-price rises would be a big economic boost for a world getting back on its feet post-pandemic, especially in Asia, where the drop in oil prices has hit particularly hard.

Prices and markets may fluctuate, but building a solid business resilience is priceless.