Coronavirus and oil

Projections for the growth of global oil demand fell to a lower level in a decade. The price of a barrel of crude oil fell by 20%, since the outbreak of Coronavirus in the Chinese city of Wuhan was announced, if we take into account the maximum reached in the world stock exchanges at the beginning of January, when the barrel of Brent reference marked US $ 68.71.

The outbreak of the virus in China affects the global supply-demand balance of oil, as a result of the decrease in consumption, among other reasons cancellations of flights and cruises, and slowdown in supply chains from China, which has enabled a increased availability of crude oil, according to the Organization of Petroleum Exporting Countries (OPEC).

Global demand registered a 435,000 barrel decline in daily oil demand in the first quarter of 2020, the first drop in global oil consumption since the 2009 recession, according to the International Energy Agency (IEA).

This means that, in order to maintain price stability, there is a reaction of the main oil producers towards the reduction of their production quotas; however, OPEC has not stated on this option.

Despite the possibility of having a pandemic on behalf of the virus, it is premature to predict that its effect severely impacts the prices of oil and other commodities, and is unlikely to lead to the critical prices of the past decade, which The economies of countries like ours were so seriously affected, in which more than 55% of exports correspond to this sector.

If the crisis escapes due to the spread of the virus, this could seriously affect the trade balances of countries such as Colombia, which have a significant amount of exports to eastern countries, with China being an important player, representing 9.7% of the total exports of the country, for an amount of 4,056 million dollars, of which 3,406 million correspond to oil.

Such a scenario would demand actions aimed at diversifying the destinations of these exports, to minimize their impact in case of the closure or restriction of these markets.

An effect of the decrease in international oil prices on hydrocarbon production activities in Colombia, would only be seen if prices below USD35 per barrel were reached. The 2014 crisis forced strict cost control and high productive efficiency by the operating companies, which allows them to have a margin of response to maintain their activity without major adjustments.

Anyway, it is recommended that the entire value chain of the sector, including operating companies, local suppliers, service contractors, and even the human resources working in the industry, be prepared to activate emergency plans that allow to handle an eventual crisis, to avoid bankruptcy of companies and even loss of life as it happened unfortunately in the middle of the last decade.

Carlos Alberto Leal Niño

President JD Acipet

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