Senior Director, BCG Center for Energy Impact
COVID-19 has created a demand shock in the oil market as social distancing reduces movement and daily travel for more and more of us each day. At present, most of the reporting agencies expect oil demand growth this year to be largely flat, well below the 1.2 million barrels/day (mmb/d) expected just a few months ago. And this demand growth forecast will likely be revised down further as large gatherings are cancelled, schools shut their doors, and companies implement policies to encourage or mandate working from home.
Demand shocks are historically acute, with strong recoveries once the crisis is past. But on top of this demand shock is a supply shock, with the OPEC+ group unable to come to an agreement in early March. Instead of cutting production by the suggested 1.5 mmb/d, the group is now free to increase production as they wish. An aggregate 4+ mmb/d in incremental production may now further flood the market in the second quarter of 2020. A combined demand and supply shock is likely to test new oil price lows, and the excess stocks that are accumulated will be difficult to work off. The supply overhang looks so daunting right now that even robust companies will face significant threats to their business.
The 2019 results tell us a lot about how the majors are positioned for the current price environment. Clearly, a long-lasting sub-$40 price environment will cause acute financial and operational stress. The results for 2019 suggest an average dividend breakeven for companies analyzed at ~$61/barrel. For all these companies, costs will need to be taken out of the business, while buybacks and dividend growth would appear to be off the table. The majors will resist cutting dividends for as long as possible, given their importance to total shareholder return, but it may be difficult (particularly for the European majors) to forestall. Leverage and cost of capital will be key competitive differentiators, with the US majors at a clear advantage.
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