How will oil and gas investment recover after the pandemic?

Written by Henry Berry, Director at Tristone Holdings

The global pandemic, to which we’ve found ourselves all captive, has had a seismic impact on virtually all of the world’s leading industries and sectors.

From energy to production, construction to finance, very few avenues have escaped from COVID-19’s clutches, unscathed. The oil and gas sector has been no exception to this, and has been amongst the worst-affected industries by the virus. So much so, that back in April US crude oil prices dropped below $0 for the first time in its history.

With all that said, the oil and gas sector has proved its resilience many times before, and the ability of the industry to rebound from seemingly innumerable crises is part of what makes it so strong. Henry Berry, director of asset-backed IPO company TriStone Holdings Ltd, lent us his thoughts on the topic, revealing how he thinks the industry is going to make yet another Lazarus-esque recovery in the not too distant future, but that we should accept market recovery is going to be a marathon and not a sprint.

Current Situation

As it stands, the industry is already beginning to display signs of re-growth, a very lightly pencil-drawn mark that it may have weathered the worst of the storm. That isn’t to say that the ensuing recovery will be rapid, far from it, however global production cuts have steadied the ship, at least for the time being.

Earlier this month, OPEC (Organization of the Petroleum Exporting Countries) made the decision to continue their diminished production output, in spite of having originally stated they would look to reinstate more normal production beyond June. Again, going to show just what a precipitous situation the market still finds itself in.

A considered and cautious approach, therefore, is most likely going to be the way in which the industry comes out of this pandemic in any kind of position of strength. At any rate, the prices of both West Texas Intermediate and Brent are inching up day-by-day, and this can only be seen as a positive for the long-term health of the oil industry.

Rebound In The East

One of the factors inspiring most optimism currently is China’s economic and industry resurgence. Indeed, it appears that the Asian giant has been making up for time lost spent under lockdown, with crude oil imports reaching an all-time high during the month of May. Over the month, they imported a staggering 11.34 million barrels per day.

Whilst China’s remarkable return to form hasn’t been enough to sway OPEC’s third quarter production guidelines, it’s certainly encouraging, and it will no doubt give other key producers such as Russia hope that before too long restrictions will be cut and production levels akin to that of pre-COVID will be permitted.

Again, however, China’s seemingly strong position should also be being met with an eye towards the wider global conditions. According to Henry, “Strong economy or no, a global virus does not discriminate, and should a second wave of the Coronavirus outbreak in China, demand may fall once more.”

Tempered Expectations

The future of the market in the immediate-term will undoubtedly mirror the behaviour of the virus, globally, and there’s very little that can be done about that. Should it rear its ugly head again, then all industries, and not just the oil sector, will have to buckle in once more. In all likelihood, the industry is going to struggle to fully recover to pre-COVID levels of market strength anytime soon.

What ‘soon’ means in this instance is very much up to personal interpretation. It could be the end of this year, or the end of the next, industry bodies are fiercely debating the topic at the moment. This, however, is looking at the situation very much through a pre-COVID lens. Examining the oil price crash from a viewpoint which fails to factor in the scale of the pandemic is frankly naïve.

Comparing it too with the financial crash of 2008-2009 is somewhat specious. It would be like comparing a breeze with a hurricane. There simply hasn’t been a global situation like this before (I was determined not to use the word unprecedented and yet here we are!) and so we cannot frame it in comparative terms.

This pandemic has taken the rulebook, torn it by the spine, strongman-style, and published a whole new one in the space of a few months. Rather, we should appreciate the enormity of the situation, and the resilience of the market to already be in a position whereby it’s already taking steps towards recovery, albeit tentative ones.

The conclusion?

The oil market’s recovery is going to be gingerly, of that there can be no doubt. Whilst the threat of the virus (and thereby lockdown conditions) persists, an inherently risk-based industry is going to find itself at even greater risk. That being said, there are indeed grounds for optimism given how well the industry has coped until this point, and investors should not be put off. If anything, now is a good time to invest whilst prices are still relatively low, as they will invariably continue to rise in the medium to long-term, even if that recovery experiences hiccups along the way. What’s needed, however, is smarter investment. We’re entering an era of the shrews and astute O&G trader, and not the bull-headed types of old.