The first two shocks in the history of the oil and gas industry were easy to get over and business continued thereafter. However, this time around, crude oil price in 2021 being what it is, the shock seems to be worse. Due to shale being introduced, liberal economic market trends, more than enough supply, etc, poor returns are the result. Prices are nearing the lowest seen in almost 30 years. The pandemic has only quickened what was going to be a significantly negative period in this industry.
No one knows the degree and the duration of the crisis that is taking place in the crude oil industry, and thereby affecting crude oil trading. Nonetheless, one fact is abundantly clear - it will be a massive challenge to return to past days when the industry’s performance saw better days without major shifts to upset the apple cart. However, trading oil will always continue to have its place in the multi-trillion-dollar segment for many years hence. Far too vital to actually fall on its knees, it is the backbone of the production of affordable and sustainable electricity.
The crude oil industry has been witnessing lengthy megacycles of rapidly shifting demand and supply motivating the sector. The demand for gas and oil has increased, but OPEC, till now, could manage to maintain stable pricing. Several opportunities were born due to major shifts in politics and advancements in technology. As a result of the ‘cost curves’ of the industry, rating assets of production from low to extremely high, these became extremely steep. Consequently, market clearing prices surged due to the heightened price of production which was essential to meet growing demand. Similarly, LNG and gas were affected, as these related to prices of oil. The global refining capacity and its steep ‘cost curve’ still managed to rise up, sustaining significant margins while the pandemic world was travelling downstream. Companies rushed to invest, getting more and more barrels. This created too much demand and raised crude oil price in commodity market sectors. It also created expansive reserves of crude oil and its products.
The pandemic has struck the world like a lightning bolt, in more adverse ways than one. The demand for products that include crude oil has dropped by a minimum of 20%, and refining is in dire straits. Analysts believe that demand will only recover in a couple of years. Moreover, as there was practically no action in the aviation industry during the pandemic, the forecast where jet fuel is concerned is particularly pessimistic. Crude oil trading has, thus, taken a huge hit.
Companies will have to find methods to safely operate as the pandemic isn’t formally over yet. Also, the issues of complete storage, costs reducing below expenditure for many operators, and markets closing for the largest participants, have to be dealt with. Nevertheless, all is not lost. In case you want to invest in securities or gold, you can always find positive ways for wealth allocation at Motilal Oswal.
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