As the global community contends with the novel coronavirus, the oil industry is set to face a reckoning the likes of which it has not encountered before. With demand for oil dropping worldwide at a steady pace due to the virus's unprecedented spread, the already ailing oil industry is faced with the hard-to-tackle dilemma of how to approach a sensitive problem while avoiding a knee-jerk response that could have disastrous side-effects.
The COVID-19 outbreak is unlike anything the global community has ever faced; the novel coronavirus has spread so rapidly and across such vast distances that the global community was caught largely off guard. As could be expected, the rapid spread of the virus caused a global panic, which came with a multitude of effects, such as a sharp decline in travel worldwide.
The downturn in global travel has done little to help the oil industry, which was ailing well before the outbreak caught the attention of the global community. The U.S.-China trade war drove prices down and kept them relatively low, but ongoing negotiations between the U.S. and China bore some relief and allowed a slight rebound in oil prices. The sudden downturn in global demand for oil products as airline traffic decreases and many people opt to remain at home erased any progress made and drove oil demand to record lows.
The oil industry now faces a reckoning in tackling a situation there is no proper historical precedent for. Already, many companies have been forced to write down assets and contend with declining revenue and share prices; these issues will only continue to worsen as the situation expands. Even after the spread of the virus is put in check and cases begin to slow worldwide, the demand for international and domestic travel will likely remain low for some time after.
The supply glut currently dragging oil prices down may well extend into the future if the oil industry does not monitor its production and adequately address low demand. Already, there appears to be some relief as OPEC prepares to make deeper production cuts, and the United States' crude oil inventories appeared to have gained less than expected, lessening the increase in the supply glut. There are, however, potential obstacles to OPEC's production cuts as Russia seems to be less than enthused over the possibility of additional production cuts, with Russian leadership going so far as to say that Russia can "deal with" the low prices.
For countries such as Saudi Arabia, which are more reliant on energy exports, low prices are a far more significant issue. Russia's refusal puts its relationship with OPEC in a precarious position, especially as some experts theorize that OPEC may go ahead with production cuts without Russia's cooperation. Less cooperation between OPEC and its partners in a time of crisis could significantly harm relief efforts and will inevitably disrupt regular operations once they resume.
Production cuts will not help prices recover immediately and may not help recovery happen any time very soon. Still, it could stabilize the decline in oil prices and help the industry weather the coronavirus. A hard no from Russia, however, could limit the relief that the industry sees from production cuts. Continuing production at current levels will leave the industry struggling with low prices long after the coronavirus situation is under control as the industry struggles to whittle away at the existing supply. Relief is indeed possible, but refusing to address the supply glut and the threat of long-term oversupply could cause longer-lasting harm than the industry may expect. The key is cooperation, and while much of the industry appears ready to work together, a united effort will be the only sure-fire way to ensure the best possible outcome as the oil industry faces a reckoning in the making.