{"id":2796,"date":"2020-04-11T14:07:27","date_gmt":"2020-04-11T14:07:27","guid":{"rendered":"https:\/\/thefinanceghost.com\/?p=2796"},"modified":"2020-04-11T14:07:27","modified_gmt":"2020-04-11T14:07:27","slug":"coronavirus-has-the-oil-world-over-a-barrel","status":"publish","type":"post","link":"https:\/\/thefinanceghost.com\/index.php\/2020\/04\/11\/coronavirus-has-the-oil-world-over-a-barrel\/","title":{"rendered":"Coronavirus has the oil world over a barrel"},"content":{"rendered":"

W<\/span>e should be thanking our lucky stars every day that South Africa\u2019s fortunes aren\u2019t dependent on the oil price.<\/p>\n

Countries like Saudi Arabia, Kuwait and Iraq are enormously dependent on oil. Saudi Arabia\u2019s petroleum sector accounts for over 40% of GDP.<\/p>\n

Closer to home, countries like Angola and to a lesser extent Nigeria also count the oil price among their key dependencies. This isn\u2019t great news for South African companies with investments in those markets.<\/p>\n

If anything, our risk as a country stems from Sasol being one of the largest corporate taxpayers in South Africa. A stubbornly low oil price certainly does Sasol no favours. Overall though, we are probably in a net benefit position from a low oil price, helping to keep consumer inflation down in a negative growth environment.<\/p>\n

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Oil price collapse<\/h3>\n

The law of supply and demand is demonstrating its power in the oil market. Commercial aircraft have been grounded and hardly anyone is driving around. The New York Times reports a 25% decrease in demand, which is cataclysmic in an industry that historically enjoys limited fluctuation in demand.<\/p>\n

Saudi Arabia and allies inadvertently chose this environment to launch a price war, ramping up output and driving the price down even further. This crushed the U.S. shale industry, which isn\u2019t an outcome that either the Saudis or Russians would\u2019ve cried about.<\/p>\n

It also crushed Sasol\u2019s share price.<\/p>\n

The protagonists made a terrible mistake, however. They didn\u2019t foresee the collapse in demand from Coronavirus, which pushed oil prices to lows that are unworkable.<\/p>\n

As the political dust settled, a deal was brokered last week to cut production by 10 million barrels per day in May and June. This will supposedly ease gradually to 6 million barrels per day until April 2022, which gives us some valuable insight into how long they foresee the subdued demand carrying on for.<\/p>\n

Interestingly, Mexico pulled off a phenomenal negotiation. After they stood firm on limiting the number of barrels they are willing to cut, America agreed to make up for Mexico\u2019s shortfall.<\/p>\n

There won\u2019t be much love lost between Trump and the Mexicans\u2026<\/p>\n

Too little, too late?<\/h3>\n

It sounds helpful for the oil price, but it simply isn\u2019t enough.<\/p>\n

At daily production of approximately 100 million barrels per day, this is only a 10% cut in production despite a 25% (or possibly higher) drop in demand. This means that oil inventories will continue to be stockpiled, eventually leading to a complete collapse in the oil price if demand takes longer to return than OPEC+ is forecasting.<\/p>\n

This is good news for the South African consumer and potentially bad news for Sasol. Speculators may look to take profits on Sasol generated in the past couple of weeks, but longer-term investors will likely ride out this volatility and look towards a future where Sasol returns to former glory.<\/p>\n

The emissions mission<\/h3>\n

Sasol\u2019s public relations department will be kept busy in the next two weeks. The Minister of Environment, Forestry and Fisheries upheld an appeal by a group of environmental activists to have greenhouse gas emissions data released for 16 heavy polluters in South Africa.<\/p>\n

Sasol is on the list, along with several mining houses and our beloved electricity SOE, Eskom.<\/p>\n

This will put Sasol under public pressure to show improvements in coming years, which could introduce further costs into their business, but it\u2019s not like Sasol\u2019s environment status will be a surprise to anyone. There aren\u2019t any green funds currently holding Sasol shares who will be shocked into an immediate need to sell after the data is released.<\/p>\n

I find it unlikely that this will be the cause of any significant moves in the share price. Sasol\u2019s current investor interest lies in trading moves in the oil price, not emissions data. With that said, I\u2019m only too happy to see environmental pressure applied to companies. Some industries will always be structurally higher polluters than others, but this doesn\u2019t mean they can\u2019t improve.<\/p>\n","protected":false},"excerpt":{"rendered":"

We should be thanking our lucky stars every day that South Africa\u2019s fortunes aren\u2019t dependent on the oil price. Countries like Saudi Arabia, Kuwait and Iraq are enormously dependent on oil. Saudi Arabia\u2019s petroleum sector accounts for over 40% of GDP. Closer to home, countries like Angola and to a lesser extent Nigeria also count the oil price among their …<\/p>\n","protected":false},"author":2,"featured_media":2798,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_mi_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[64,26],"tags":[76,75,77,42],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/2796"}],"collection":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/comments?post=2796"}],"version-history":[{"count":0,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/posts\/2796\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/media?parent=2796"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/categories?post=2796"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thefinanceghost.com\/index.php\/wp-json\/wp\/v2\/tags?post=2796"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}