COVID-19’s impact on the transportation sector is affecting oil and gas demand and prices around the world. The peak of the impact was seen when crude prices futures market actually went negative.
In late April, Nassr Adris, a producer for Al Jazeera, a Qatar-based news channel, reached out to Marty Stetzer, president of EKT Interactive in Houston to gain insights on the volatility surrounding the current oil and gas market.
Stetzer has over 40 years of experience in the oil and gas industry. He has held various management and consulting roles with ExxonMobil, Superior, Wilson Industries, PwC, Schlumberger, Shell, Ernst & Young, and more. Ten years ago, Stetzer created EKT Interactive, a Texas-based company focused on the design and delivery of interactive training projects to global oil and gas clients.
Stetzer’s extensive and varied experiences provide insight and context for folks either new to or familiar with the energy industry.
Nassr Adris (NA): What is crude oil/petroleum? Would you mind providing a brief history of how the industry came to be?
Marty Stetzer (MS): Crude oil is found in reservoirs underground. It was formed hundreds of millions of years ago by depth, temperature, and pressure as organic matter from inland seas was covered with sediment. The first discovery was in Pennsylvania in the 1880s. Followed by huge finds in the early 1900s in Texas. Saudi Arabia had its first major find in the 1930s with the Dammam No.7 well [which is] still producing today. One interesting thing to a lot of folks is that oil was originally used for lighting kerosene, replacing whale oil. The mass production of cars starting with Ford’s assembly line shifted crude oil’s biggest application from lighting to refined products for the transportation industry.
NA: Why is oil in demand around the world today?
MS: Oil’s biggest market is transportation, especially the automotive fleet.
When you find oil, you also find what’s called associated natural gas. Due to rising global production of oil, the natural gas market has become even more prevalent with the move to cleaner power generation since natural gas has 30% to 35% less emissions overall than coal.
|
Sector |
Oil % |
Natural Gas % |
|
Electric Power |
1% |
35% |
|
Industrial |
25% |
33% |
|
Residential |
3% |
17% |
|
Commercial |
2% |
12% |
|
Transportation |
69% |
3% |
Source: US Energy Information Administration, 2018
NA: Can you describe the oil market and explain how it works to the layman?
MS: The oil market is divided into the product side, which is gasoline, diesel, jet fuel, etc., and the crude side. Once products are made from crude, they can go into a service station, be sold wholesale, or sold to a commercial customer like railroads, FedEx or UPS or airlines.
Prices are set by traders on both sides.
The crude story depends on a supply and demand balance based on global interactions, the availability of storage, and whether producers are trying to increase or decrease their production. For most of my corporate life, Saudi Arabia was known as the swing producer, essentially opening or closing a valve on its supply whenever it wanted to carefully manage the crude price.
Saudi Arabia depends on oil for most of its fiscal budget, and its dense conventional reserves make it a powerhouse on the global stage. The advent of shale production from the U.S. made it one of the largest oil and gas producers in the world. Russia is the third-largest crude source and is a big influence on Europe’s gas supply.
NA: Can you describe the processes and costs of storage, transport, and refining?
MS: In the U.S. and other developed countries, refineries are supplied by either pipeline or ship. If a refinery is supplied by a pipeline, it needs three to five days of crude oil storage to smoothly run the refinery.
If it’s supplied by a ship, it would need between 35 and 40 days. Therefore, there needs to be enough tankage at a refinery to hold all that crude oil, depending on its supply pattern. Refiners must also think in terms of a safety stock in case there is a problem with supply. The supply pattern and safety stocks determine the actual storage capacity at a refinery for crude oil.
NA: What about on the product side?
MS: The product side is a little more fluid and integrated. For example, a product pipeline in the U.S. feeds a terminal, let’s say from Houston to Atlanta. Unmanned tanker trucks are filled every day. There’s a lot that’s done automatically from the service stations these days with digital control systems. When a service station gets low it automatically requests a refill from a tank truck supplier. A great deal of the supply system on the product side is the trucks, the pipelines, and the terminals.
Then there’s the export side. There have been cases of arbitrage in the past where U.S. gasoline was cheaper than European gasoline. In response to cases like this, refineries can load a product ship, which is smaller than a crude ship, to move product internationally. Arbitrage opportunities are relevant at specific points in the year for heating oil and diesel fuel.
NA: What has COVID-19 done to oil demand? Talk me through the direct impact on the oil industry, and any reverberating effect that has on other sectors of life in business.
MS: The main impact of COVID-19 so far has been in the transportation sector. Oil demand has dropped 30% across the world. This has never happened before. You can obviously see less traffic in major cities like Houston. Even with things returning to normal, the EIA still sees total average 2020 production falling from a little over 100 million bpd to about 95 million bpd and consumption falling from about 101 million bpd to just a little over 92 million bpd.
The problem going forward is that we have a high supply situation. The traders have never seen low demand and high supply at the same time. Usually when supplies increase, the price decreases, and people drive more. But today, with all the restrictions, no one’s driving and no one’s flying. And in the industrial sector, another big area is the use of marine fuel for ships. A lot of the international trade routes have also declined dramatically in the last three months.
NA: What was the significance of oil prices turning negative? Could people get cheap or even free petrol at the pump? Did people just buy some barrels of oil and sell them a couple months later when prices recovered?
MS: The simple explanation of why prices went negative has to do with financial markets. At the end of the day, oil is a commodity that can be hedged. Prices on the crude contract went negative on April 20.
That was a perfect storm when the pandemic was at its worst. You had contracts expiring with buyers on the hook for oil that they couldn’t sell, that no one wanted to buy, and there was nowhere to store it. These contacts are for 1,000 barrels, which is 42,000 gallons or 35,000 liters. If you wanted to participate – even if you have a gigantic swimming pool to store it – you would have needed a permit, and a way of getting delivery!
NA: What’s being done to fix the problem and return oil prices to normal?
MS: Three things have happened. OPEC and Russia, known as OPEC +, have extended 9.7 million bpd of supply cuts through July, which will alleviate pressure on the supply surplus. The second thing is refineries are slowing or even shutting down because many are operating at a utilization rate of 60 percent, which is unsustainable. The third thing is that low prices are starting to slow down U.S. production.
NA: Generally speaking, who benefits from high oil prices and low oil prices?
MS: Generally, the consumer benefits from low oil prices and the producers benefit from higher oil prices. Consider that this is a $3 trillion business with a supply chain that depends on reliability. There’s a certain price for the producers to be economic, to continue to produce and even stay in business.
In the U.S., shale wells can lose half their production in less than a year, so there needs to be a certain price that incentivizes new drilling and new production. The consumers love a low price. It lowers delivery costs for Walmart, Costco, and other retailers. It lowers jet fuel cost for airlines and cargo costs for the international transportation industry.
The downstream side is a little more complicated. Low prices on the product side paired with high prices on the crude side can squeeze what is called the “refiner’s margin,” a measure of profitability. Low prices on the crude side paired with high prices on the product side can make a refiner look quite profitable.
NA: What’s the relationship between oil and the economy?
MS: Oil is needed for almost every manufacturing operation and the petrochemical industry. Everything that is in your room is probably a product of the petrochemical industry. Your earbuds, the wiring covering, your laptop. Petrochemicals are a huge part of what the oil industry ends up supplying and manufacturing. Oil acts as a backbone to many industries. Everywhere you look, the oil industry is present.
NA: What does the future look like for oil companies and the average person on the street, if the global lockdown continues?
MS: If the global lockdown continues, we’re going to continue to struggle with decreased demand. The crude price will fluctuate widely and [will] depend on how fast producers can respond to that decreased demand.
Because of its complexity, the oil industry supply chain depends on a reliable demand forecast [due to] the time it takes to get crude to a refinery, [get the] product refined, and moved through the system to the end customers. Every oil company uses a demand forecast, and every product trader uses a demand forecast to try to figure out what’s next.
All bets are off until we come back to what is being called the “new normal.” In my opinion, companies have realized the effectiveness of remote work so there will be a shift to less driving for work.
In terms of airline travel, I read that after 9/11, it took three years for airline traffic to get back to the pre-9/11 levels. You’re not going to see jet fuel being consumed rapidly.
Some people are expecting a “V” shaped recovery, but I don’t believe that can happen.
On the industrial side, the international manufacturing and shipping supply chain is going to alter the demand for marine fuel. International trade could stay down if consumer spending for imported products like cars goes down.
NA: Would you like to add any final commentary?
MS: The consumer will notice sustained low prices at the pump until things stabilize. This could take three to six months or even longer, depending on how quickly production can come down.
NA: Thanks for your time Marty. I learned a lot today!
MS: Thank you Nassr; I enjoyed the discussion.
EKT Interactive is an oil and gas training company specializing in mobile-ready, digital learning content, especially for those that are new to the oil and gas industry. Another major audience is support staff (IT, sales, HR, accounting, etc.) to make them more effective in working with operations.
The company’s flagship course, Oil 101, tells how the upstream, midstream, and downstream industries work. Oil 201 is the follow-up course that is a “deeper dive” on the fundamental topics.
Over the years, EKT Interactive has also produced topic-specific digital content on other fields such as welding, power, and refining.
With that, its learning community has grown to over 11,000 members who stay engaged through the company’s network of podcasts as well as its weekly Energized! newsletter. Energized! not only discusses the big headlines of the week, but also gives an ongoing narrative of emerging trends and prevailing themes in the industry.
It is EKTi’s mission to capture knowledge from senior industry folks, then engage adult learners with training videos that:
- are factually correct,
- with high-quality production, and
- have a compelling and entertaining story
Headline photo courtesy of Shutterstock
Oil and gas operations are commonly found in remote locations far from company headquarters. Now, it's possible to monitor pump operations, collate and analyze seismic data, and track employees around the world from almost anywhere. Whether employees are in the office or in the field, the internet and related applications enable a greater multidirectional flow of information – and control – than ever before.