Oil Industry Is at a Crucial Point — The Pandemic has Created Havoc

There is a common belief that ‘crisis’ in Chinese means both danger and opportunity.

Well, that’s not exactly right. At least not according to the University of Pennsylvania’s Professor of Chinese Language and Literature, Victor H Mair.

In Chinese, the word crisis (wēijī) is written with two syllables: wēi (危) and jī (機/机). Mair says it’s true that the wēijī means ‘crisis’ and that the wēi syllable in wēijī gives the notion of ‘danger’. Yet the jī syllable of wēijī does not signify ‘opportunity’.

As he explained in the blog Pinyin.

The jī of wēijī, in fact, means something like “incipient moment; crucial point (when something begins or changes).” Thus, a wēijī is indeed a genuine crisis, a dangerous moment, a time when things start to go awry. A wēijī indicates a perilous situation when one should be especially wary.

Oil is certainly at a crucial point.

The pandemic has created lots of havoc in the oil industry

Demand collapsed during the pandemic as people stayed home, countries closed their borders and global trade declined, as well as concerns on how to store all that excess oil.

So much so that prices went negative, as you can see below:

Source: Trading Economics

There was too much supply and not enough demand.

It’s interesting, considering that for the longest time we’ve been concerned about running out of oil.

Oil hasn’t recovered to its pre-pandemic price levels, but it’s hovering around US$40.

And it doesn’t look like it will recover for a while.

While oil prices are up slightly today after Hurricane Sally hit US oil producers, the big question is demand.

It’s likely to stay low with the pandemic still around and lower global growth forecasts.

The OECD expects global GDP will decrease by 4.5% this year.

With more people working from home, less travel and the US, India, and Europe still struggling to contain the pandemic, demand is unlikely to pick up for a while.

It’s something OPEC recognised this week too.

On Monday OPEC revised their global oil demand forecast down by 400,000 barrels a day. They’re now expecting consumption to decline by 9.5 million barrels per day to average 90.2 mb/d.

OPEC doesn’t expect this demand to come back anytime soon. As they said :

Turning to 2021, the negative impact on oil demand in Other Asia is projected to spill over into 1H21. At the same time, a slower recovery in transportation fuel requirements in the OECD will limit oil demand growth potential in the region. Additionally, risks remain elevated and skewed to the downside, particularly in relation to the development of COVID-19 infection cases and potential vaccines. Furthermore, the speed of recovery in economic activities and oil demand growth potential in Other Asian countries, including India, remain uncertain.

Meanwhile renewables are at oil’s heels…

Even through the pandemic and energy demand falling, wind and solar power grew 14% in the first half of 2020 when compared to the same period last year.

As we said, oil is at a crucial point and some of the ASX-listed energy producers are already feeling the pain.

Shares for Woodside Petroleum Ltd [ASX:WPL], for example, have dropped by over 45% since the beginning of the year. Also, Oil Search Limited [ASX:OSH] shares have collapsed by over 60% for the year.

Oil Search has also written down assets and has cancelled their dividend for the first half of 2020.

If you’re looking for dividend investments, we think there are better investments out there.

In his free report ‘Five Dividend Stocks Set to Thrive in the Post-Pandemic Era’, Rum Rebellion editor Greg Canavan writes about one energy company in particular he thinks offers a better opportunity as well as four other dividend investment ideas.

To download this free report, click here.


Selva Freigedo

Selva Freigedo is a research analyst for The Rum Rebellion.

Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table.

Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default.

Selva has also lived in Brazil, Spain and the USA.

Back in 2000 she was living in the US as the dot com bubble popped…
And in 2008 she was in Spain as the property market exploded and then collapsed…

She has seen first-hand what happens when bubbles burst.

Selva joined Fat Tail Investment Research’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.

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