Although oil markets have bounced up since the historic negative prices seen in April 2020, questions remain about the stability of oil markets amidst the COVID-19 pandemic. We held a webinar on 17 June 2020 with Dr. Tilak Doshi, Visiting Senior Fellow at the Middle East Institute, NUS and Ms. Florence Tan, Deputy Editor, Commodities and Energy, Asia at Thomson Reuters discuss the outlook for energy markets and the implications for Singapore and the region. A video of highlights from the session will be posted on YouTube, with the full recording available as premium content for our SIIA corporate members.
Geopolitical Rivalries Driving Prices
When the COVID-19 pandemic first started to emerge, Saudi Arabia proposed that the Organization of the Petroleum Exporting Countries (OPEC) and the wider OPEC+ grouping cut oil output in order to stabilise prices. But Russia disagreed, because this would erode their market share and further cede ground to the United States, which has emerged as a major exporter in recent years due to the boom in shale oil.
“That’s when all hell broke loose,” said Dr. Doshi. The disagreement escalated into an all-out price war, with Russia seemingly aiming to both harm the US shale sector and “teach the Saudis a lesson”.
In April 2020, oil price benchmarks hit the lowest point in history, with the American WTI benchmark turning negative. The US and other non-OPEC producers stepped in to bring both Saudi Arabia and Russia to the negotiating table. Producers agreed to output cuts. By the end of May 2020, oil prices bounced back, with Brent up to nearly US$40 a barrel.
Implications for Singapore and the Region
On the demand side, China is leading the world as its economy reopens. As a net oil importer, China seems to have benefited from the price drop. But what do lower oil and gas prices mean for Asian countries where oil and gas makes up a significant proportion of the economy?
Although Malaysia suffers to some extent as it is an oil and gas producer, lower oil and fuel prices also help the competitiveness of Malaysia’s other sectors. The same should hold true for economies such as Vietnam and Thailand, especially with COVID-19 economic stimulus packages boosting energy consumption. But the biggest concern is still COVID-19 itself and the disruption caused by the pandemic, the extent of which remains unclear.
Turning to Singapore, one major impact of the oil price slump has been the collapse of oil traders such as Hin Leong and ZenRock. Oil trading depends significantly on credit, and Ms. Tan noted that banks are now even more wary. Questions are now being asked about Singapore’s commodities trading sector. If the collapse of firms is attributable to outright fraud, then Singapore’s regulations are not to blame. But if there are gaps in governance, Singapore needs to address them.
Will Low Oil Prices Help Sustainability?
Amidst the COVID-19 pandemic, some have argued that volatility in oil and gas markets may help the transition to lower-carbon energy sources. However, Dr. Doshi stressed that these calls are political. In Europe, where there is a strong environmental lobby, COVID-19 is being used as an excuse to push for more green energy. But due to the economic stress caused by the pandemic, many governments are more interested in immediate recovery rather than long-term energy transition. Ms. Tan added that due to falling fuel prices, Indonesia is scaling back its targets for biodiesel use, and new palm oil refinery projects have been delayed. Southeast Asia is also seeing an increased use of coal, with imports into Thailand and Vietnam going up.
Will the Rebound in Oil Prices Last?
“There are a few bright spots leading the oil price rebound,” Ms. Tan said. According to a Thomson Reuters survey, there is currently a 74 percent compliance rate among oil producers with the agreed production cuts. Ms. Tan expects that compliance will be tight for the near future.
However, Dr. Doshi cautioned that “by definition, cartels are never stable”. Given the unusual circumstances, oil producers are playing along, even ones such as the US, Canada, Brazil, and Norway who do not normally participate in such deals. But the tensions between the US, Saudi Arabia, and Russia have not been resolved. If prices go too high too quickly, the agreement could collapse.
