COVID-19, Oil & Renewables

The price war between two major OPEC+ oil suppliers, Saudi Arabia and Russia, initiated the decline of the oil prices, reaching 20,48$ per barrel of WTI on 18 March 2020. While markets were trying to absorb the shock, governments around the globe started to take containment measures to prevent greater turmoil, which eventually disturbed and halted processes such as manufacturing, transportation and energy production that are heavily contributing to the global oil demand. Hence, the global oil demand declined by 5% in the first quarter of 2020, erasing a decade of demand growth. Low demand levels and arising storage shortage caused prices to plunge even further, and for the first time in the history, WTI (West Texas Intermediate) prices fell to the negative zone. Seamlessly, low prices inflicted major economic losses to oil producers. The US shale industry is among them, as the number of operating rigs had dropped by 40% during the past month. To give a summary about what happened in the financial markets, the share price of oil ETFs investing in crude futures in the spot month contracts also plunged with the declining oil prices. Dramatically, ETFs such as USO (United States Oil Fund) had decided to execute 1 for 8 reverse split to comply with the NYSE Arca’s requirements and continue trading.

Effects of the ongoing pandemic on the global economy resonate down the energy market. Energy demand and GDP often indicate a positive correlation; as economies grow, energy demand also increases. IEA reported that the global electricity and energy demand declined by 20% and 3.8% respectively in the first quarter; which aligns with the latest quarterly economic data. To give an example from the countries that are most affected by the pandemic, the US reported a 4.8% decline in GDP, the sharpest decline since the Great Depression, whereas France reported 5.8%. It seems like we will likely to obtain similar, but more optimistic data for the second quarter as the fight with the pandemic continues. However, one thing is certain, expecting a V shape graph is unrealistic and “the return back to normal” will be gradual.

France GDP and its main components (Source: INSEE)

Considering the green energy field, in Global Energy Review 2020 IEA stated that renewable energy demand recorded a growth in the first quarter and expected to increase according to the full year scenario due to low operating costs. Furthermore, it is noted that capacity growth will also have a significant contribution to that. In the same scenario, it is reported that oil demand could drop to 2012 levels, by 9%. Aligning with IEA’s prediction, during an interview with the CNBC BP’s CEO Bernard Looney stated that they are expecting a demand reduction around 16 million barrels per day in the second quarter. It is particularly hard to exactly predict how the situation affects renewables. However, decisive factors will be the duration of the confinement measures and the structures of economic recovery packages in response to the crisis. Low oil prices might continue to support the renewables as low prices mean lower returns from the oil projects and this will push investors and hedge funds to diversify their portfolios with “greener” and considerably “less volatile” sources. On the other hand, low prices might decrease the competitiveness of the renewables and cripple the renewable growth by encouraging emerging markets to increase their oil consumption. Also, increasing renewable demand posses an internal threat for renewable growth as it may result in lower corporate power purchasing agreements pricing, which yields in lower returns scaring off the investors.

Whatever the scenario is, policy and decision-makers have the last word in turning the crisis into an opportunity. Growing public attention on climate change over the years and the cooperative spirit among governments formed during fighting off the COVID-19 pandemic will surely influence the decision-making process. I believe signing parties of the Paris Agreement will use this crisis to consolidate their commitment to the agreement. Amid this process, the European Union has to take extra responsibility and set an example by promoting the vision of the European Green Deal.