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The Essential Podcast, Episode 4: 'It's All Demand' – Making Sense of Oil Markets

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The Essential Podcast, Episode 4: 'It's All Demand' – Making Sense of Oil Markets

About this Episode

In conversation before the historic OPEC+ oil production cut agreement was announced, host Nathan Hunt and S&P Global Platts' Global Director of Analytics Chris Midgley try to make sense of unprecedented low oil prices caused in part by coronavirus and the role of OPEC on the global stage.

The Essential Podcast from S&P Global is dedicated to sharing essential intelligence with those working in and affected by financial markets. Host Nathan Hunt focuses on those issues of immediate importance to global financial markets – macroeconomic trends, the credit cycle, climate risk, energy transition, and global trade – in interviews with subject matter experts from around the world.

Listen and subscribe to this podcast on Spotify, Apple Podcasts, Google Play, Google Podcasts,  Deezer, and our podcast page

Show Notes

Read the research discussed in this episode:

  • As the status of oil markets continues to evolve, S&P Global's digest of content on oil markets in crisis is updated daily with the latest news.


Nathan Hunt: This is the Essential Podcast from S&P Global. My name is Nathan Hunt. It's been a wild month for oil markets. With approximately a third of the global population under some form of lockdown and many of the world's largest economies at a virtual standstill, demand for oil has fallen to historic lows. At the same time, oil producing countries have increased production after negotiations for a production cut at the OPEC plus meetings in early March fell apart due to profound differences between Russia and Saudi Arabia. With oil prices stuck in the basement, the questions remain: Who's winning? Who's losing? And who just wants the game to end? I'm joined today by Chris Midgley, Global Director of Analytics for S&P Global Platts.

Chris Midgley: Great to be with you.

Nathan Hunt: Chris, where are you calling in from today? Are you part of the global population under lockdown?

Chris Midgley: Indeed. I'm calling from just outside of London. Have been working from home now for three weeks, learning to adapt, and in fact, I feel locked down in two ways. Not only stuck at home, but stuck with a market, which is insanely crazy right now and keeping me and all my 150 analysts hugely busy right now.

Nathan Hunt: Let's go back to the OPEC plus negotiations in early March. What happened? What did the Saudis want? What did the Russians want and why?

Chris Midgley: Yeah, this was a big surprise to many of us. We thought we were all moving to see some more production cuts to tighten the market, maybe a million and a half barrels a day of oil to be taken off. And you know, there were huge expectations and all of a sudden something went wrong. The Russians didn't want to play ball any longer. And I think really what happened there was Russia basically decided that they've been supporting the high cost producers, and in particular the US producers for too long. I think they felt that the US had been imposing sanctions on them in the shape of sanctions on Rosneft, sanctions on Nord Stream 2 gas pipeline, and felt the time was enough. Perhaps it was time to move away from this price support strategy and move back to a market share strategy, and then everything unraveled beyond that. It then followed with Saudi Arabia saying, well, if that's the game you want to play, we'll play that game. We'll move to market share. And with that OSPs, their official selling price, where they announced the price of the crude they're going to sell until April, they basically announced huge discounts. They showed that they were going to be willing to put as much oil onto the market as customers wanted to buy. In fact, moving from 9.7 million barrels a day of production up to, what they claimed, 12.3 million barrels a day, and all of a sudden, the world was in a completely different strategy and in particular OPEC as far as crude supply was concerned.

Nathan Hunt: What was the immediate result in terms of oil markets and prices after the collapse of those negotiations?

Chris Midgley: Well, all prices fell sharply. I think people took some time to try to understand it, but the price fall was not nearly as significant as what was to come. We need to remember back then, we were still assuming that the coronavirus was going to be limited to China and perhaps a little bit of Asia. There was no expectation at this stage of the pandemic. And so while I think the market was certainly concerned, they probably felt that there would be some measured response and a little bit of impact, and there may be some rebalancing. So, at that stage, yes, it was a shock to the market, but it wasn't nearly as much as what was yet to come in the shape of the global pandemic being declared.

Nathan Hunt: In terms of just the production increases alone, who stands to win and who stands to lose under this system?

Chris Midgley: Well, I think in general, low oil prices are always good for countries which are net energy importers, and of course two of the largest economies or growing economies in the world, China and India, rely on imported energy, whether it's gas, whether it's oil, and so they are certainly out there to gain from lower energy import prices. The big loser ordinarily would be the exporters. So that could be the OPEC countries; low oil prices, less revenue, harder to balance their fiscal budgets, and that also includes Russia. But in the short term, they have got sovereign reserves, which they could rely on. Saudi, in particular, their debt to GDP is only 25 percent so its relatively low, so they can cope with a period of low prices. So, the biggest loser was definitely the US and that was clearly where Russia was pointing its shot at. And in fact, for the US, it's what I would call a quintuple whammy. It hits five sectors. It hits not only the oil production, impacting the shale producers, but it also impacted the gas producers, because we had a narrowing of the oil to gas differential and more ethane, which normally goes to petrochemicals, impacting the gas market, putting more ethane into gas. So the gas market was put under pressure, but petrochemicals, which had used to have an advantage of cheap ethane, now was struggling to compete with low costs for petrochemicals into places like Europe and Asia. And then to the pain, it's also impacted the US's biofuels industry. Ethanol prices on the floor because gasoline prices came down, killing ethanol margins. And the last market that has started to suffer has also been the LNG market as a result of oil prices coming down. Much of the LNG market in Asia is basically priced on an oil index basis. So the net backs, the US started to weaken the liquefaction plants in the US. So five sectors of the energy complex there impacted in the US.

Nathan Hunt: You had referenced earlier just having the OPEC plus negotiations collapse was one thing, but then we've had this global pandemic. What has the impact of the coronavirus been on oil markets?

Chris Midgley: Absolutely huge. You know, Nathan, when we were first looking at this, we looked at it and said there's a best and a worst case for China. And in that we started the year with 1.3 million barrels a day of demand growth for 2020; we revised that down to 860; we revised that down to 240, as we said. Well, we've got China. It was at the China worst case, a bit of impact outside of China, but then the pandemic came. We'd always said initially, in the outset thought, it could be contained within Asia. The global pandemics saw us quickly revising those numbers down to 4.5 million barrels a day of decline in demand growth for 2020. Unprecedented level of decline, as a third of the world, as you mentioned earlier, became locked down. And when we look at that, more importantly, in the impact that we're having right now, in April, May, and June, we're talking about around 16% reduction in demand --that's a 16 million barrels decline in demand for oil in those three months. That's unprecedented levels of drops. And when we look at that, you say 16 million barrels a day sounds like a lot, but as I've put it in perspective, it's a 50% reduction in the demand for jet fuel for the aviation industry. And we're seeing a 75% cut on international flights. You know, domestic flights are still going, although mainly empty. It's a 25% drop in gasoline demand; a third of the world is not driving. You know, in places like New York or London,  we've seen traffic down to 10% of normal levels. Even lower in some places. Things like gas, solar and fuel, all which tend to be used more for industrial activity, seeing slightly lowered drops, more like 10 to 15%, as the countries try to hold onto their industrial activity as long as they can. So huge drops and big implications for the oil industry.

Nathan Hunt: How much of the current price do you think is a function of those drops in demand, and how much is a function of the Saudis and the Russians producing more?

Chris Midgley: It is really, it's demand. At the end of the day, when we look at it, I talked about that 15 million barrels, it's between 15 and 20 million barrels a day of lost demand, partly because we're also seeing refineries that process crude to make the products are under running even more. Partly because there's not a demand for their products. Partly because they can't get a workforce to operate at higher levels. Also impacting some of the maintenance where you can't bring these workforces in because of the coronavirus. So it's really all demand. And if you put it in perspective, that 15 to 20 million barrels a day loss of demand versus perhaps an increase of supply that was being threatened onto the market, and I see that as coming onto the market in April of 3 million barrels. So certainly, the demand usually outweighs any impact that the breakdown of the OPEC plus agreement that's had on the market.

Nathan Hunt: What is the outlook of all of this for the US shale industry?

Chris Midgley: It's pretty bleak, I'm afraid to say. We've already seen a 29% cut in capex spend. Now that has very little impact on production right now, but in the longer term and out to the back end of 2021, we'll probably see a loss of 1.8 million barrels a day of production because of that capex cut. We see rig counts coming down extremely fast. They're already down 20% and we predict the rig count to drop by 60% over this phase of economic weakness. Worse to have been hit have been the frack crews, the crews that come in having drilled the well and then  to break the rock and unreleased the oil, they've dropped by 30%. So again, activity is declining fast. And just to add to that, the industry is facing a mountain of debt maturity as it moves into 2021 and 2022 working closely with our colleagues in S&P Global Ratings, you know, we see $20 billion of debt maturing, it will now have to be refinanced somehow in 2021 and $30 billion in 2022. That's a huge amount of debt that needs to be refinanced at of time when they're making very little cashflow, but also explains why the industry is trying to hold on and keep producing as long as they can because they simply have got to try and generate some cashflow in order to support and pay that debt.

Nathan Hunt: US president Donald Trump has threatened tariffs on the Saudis and the Russians if they don't come to some sort of agreement, how much influence does the US administration have in this area?

Chris Midgley: It's a real hard one to try and understand it and also to try to quantify how much those are threats or tweets. But certainly, I think from a Saudi perspective, military aid is one of the areas, of course, of close cooperation between the US and Saudi Arabia for which there will be a certain degree of worry. Import tariffs. Well, right now a lot of crude is flowing, which is loading in April and arriving in June into the US. And that would be a concern, and especially as Saudi Arabia does have refining assets in the US. And then sanctions, as you say, which is the last, you know, sort of stick as we say here, that the US is trying to apply--well, to be honest, all the Russians have had enough sanctions thrown at them, is it about the US going alone? I think the impact and the implications become greater if it becomes global sanctions, but it is just the US, I think they are less effective. And what's going to be interesting, especially this week, is going to be the G 0 perhaps meeting around, you know, whether there should be this sort of effort to try to reduce supply. And when you look at the G20 countries, majority of them probably don't want to see supply being curtailed or reduced because they benefit from lower energy prices in general. Out of that, whether you are looking at India or China in particular, but you know, we also have the example of France, where energy prices are a big issue. The gilets jaunes, which came out to protest against higher energy prices. So governments seem to be supporting the energy industry and supporting higher energy prices. It's sort of hard to see some of the arguments, and I think that is also where President Trump is a little bit conflicted, which is why I think he's stepped a little bit away from his rhetoric around these production cuts because he also recognizes the consumer basically likes lower energy prices, lower gasoline prices of the pump.

Nathan Hunt: Assuming the Trump administration succeeds in getting purchases of oil for the Strategic Petroleum Reserve included in the next US stimulus bill, what effect would that have on oil prices?

Chris Midgley: It's interesting indeed. We've sort of swung whether they going to or whether or not, or whether they are going to allow commercial entities to use that storage. But let's put that storage in perspective. At the beginning of the year, we had about 1.4 billion barrels of spare storage including their 300,000 barrels a day of floating storage. The SPR is 90 million barrels, so about 7% of that. And if I put that in context of there being 15 million barrels a day of lost demand as a result of the coronavirus, that's still four days of storage. So 7% of world storage spare capacity. Yes, it's material, but it's still going to be filled up very, very quickly. And so in my mind, unless you also manage supply and curtail supply, it's really a drop in the ocean.

Nathan Hunt: There was some strange news coming out of Venezuela in the last week or so. The Russian oil company, Rosneft, sold their Venezuelan holdings to the Russian government. Given that the relationship between Rosneft and the Russian government is historically quite close, what's going on with this transfer of assets?

Chris Midgley: Well, I think this is more to do with the Rosneft's trading based in Geneva, who basically got impacted by these latest sanctions and was of course, one of the reasons for the breakdown of the OPEC plus agreement. By moving those assets off their balance sheet and putting it into the Russian government's balance sheet, it effectively should enable that entity to trade and not be a listed entity, which under the sanctions, by taking those assets out and therefore making sure that banks don't have any connection with those assets. So that, to be honest, is the main connection as to why that has happened. Of course, the relationship between Igor Senchin and Vladimir Putin is a strong one going back a long way. But I think that is sort of another logical step to try to free up the energy industry. the Russian energy industry, to be able to trade freely and compete freely in the market without banking sanctions impacting their trading. I think more interesting, I mean, I think for Venezuela really is how much long Venezuela can really hold on right now. With these lower oil prices, their production is declining substantially, their revenue is being hurt, and so, you know, the question is, are these some of the last dying days for the current administration in Venezuela? May we see some change there? Right now, we're expecting much lower production out of Venezuela, just simply because the economy just cannot keep those oil fields operating. They just don't have the maintenance and assets to continue to do that. Russia will at some point come back to get its debt repaid, but perhaps that's put on the sideline for now.

Nathan Hunt: We've talked a lot about the Russians and the Saudis. I'd like to focus on two other less talked about oil producing countries. Nigeria and Norway have both taken radically different approaches to the oil crisis. Why are we seeing these different approaches?

Chris Midgley: Yes. I mean, I'd also maybe throw Brazil into there as well. Now let's start with Nigeria. Nigeria has never been one to comply to the OPEC quotas and always has been one to just produce as much as they can. Right now, I think they on that same strategy, which is just get whatever cash and revenue you can, try to compete as much as you can for demand. Norway, a little bit more different situation, they're less worried about the balance of payments there in the short term. They can certainly hold off if they want to around generating revenue. The sovereign fund is a wealthy economy, so it could say, well, I'll wait until higher oil prices and not overproduce right now. But in fact, what they're finding is, despite maybe wanting to do that, what the Corona virus is doing is meaning they can't actually do the maintenance and shut down on some of their fields, which they were planning to do. So in fact, we're getting more production from them as well. But you can see it. Maybe it would be convenient for them to be able to then just shut down those rigs, those fields, you know, completely as part of an offering around some of the collective cuts. I mentioned Brazil as well, just because you're equally, they're having some issues in the fact that what we've seen in Brazil is they've actually been curtailing production. They are the one country where they've cut production by 200,000 barrels a day, but because it's become uneconomic. And what's interesting with each of those countries is what they're going to struggle with as we see very weak Brent oil prices, that the price you pay for physical crude being heavily discounted because of lack of buyers, you're going to see that those countries are going to struggle for buyers, struggle to be economic, and they're going to potentially be forced to, certainly from Nigeria and Brazil, to perhaps slow down their production. Norway, on the other hand, where it's positioned in the North Sea, does have good locality to where the demand is into Europe, and so it's more strategically positioned to put that oil into the marketplace. So that's why we will see different strategies from those as they try to navigate how to manage what is going to be a short period of extremely weak oil prices.

Nathan Hunt: Given all of these different strategies and different motivations, is OPEC still a going concern?

Chris Midgley: I think the people are looking for OPEC to cut productions shows that they are the only organization or producers who can change their production to balance the oil supply. So they're certainly coming back into the spotlight and that may be why they are interested in perhaps cutting crude, to show that they are relevant. The problem they've had is that, you know, they have been, up till now, they've been losing market share, falling down to below 30% of the market share. And so certainly what we are going to see as an outcome of this period of low oil prices is we are going to see non-OPEC producers  cutting their production and having low production in 2021. So OPEC's market share is going to increase. They are going to, as we move into that cycle, potentially have more influence. And I know people have talked about, and especially in the US, that OPEC is a cartel. I think they do play a valuable role for the commodities market. They do help to ensure a certain degree of price stability and supply security to the market. And they are the only ones who can not only switch on to put more oil when the market gets tied, but they are also the only ones who can switch off relatively quickly when the market's in oversupply. Without them playing that role, oil prices can go through a roller coaster that creates economic uncertainty for industry, for investors, et cetera, which is not necessarily a good thing. So that's what they do have an important role still to play and are the only ones who could really play that role in trying to keep the market balanced and prices relatively stable.

Nathan Hunt: What will the long-term effects on the oil sector be? Are there parts of the services industry or the supply chain that might not bounce back with higher prices?

Chris Midgley: I think there is absolutely no doubt we're going to see consolidation in the US. We've already seen a number of bankruptcies; Whiting Petroleum on the 1st of April declared, and there are a stack that are lining  up. You know, we had $11 billion last year. This year will clearly be higher. Well, that doesn't mean the oil goes away. It just means it gets consolidated into bigger players, but bigger players will probably then leverage their scale and size a little bit on the drillers and frackers. So we will see, you know, as I mentioned before, fracking down 30% the rigs are down 20%, will be down 60% by the end of this. Clearly, you know, it will be a bit of a survival of the fittest. Again, they went through this in 2015-2016. And will come back, but we will come back with less need for rigs and the number of frack cruises as I think there's some consolidation there. So they will be impacted. I think what's going to also be interesting, you know, we talk about the producers, but I think the refiners are also going through challenging times. Lots of refineries running up. Very, very low throughput because the demand is not there and you don't make any money if you're not processing crude and making it into products. So they're going to be going through some challenging, tough times. Just the head of what we think is a period where perhaps the refining industry is a little bit overbuilt, and we're heading into 2021 where we're expecting weaker margins. So I do think the refiners are also going to see perhaps some consolidation, well, maybe not consolidation, some closing down of some of the marginal, less economic refineries to tighten up the slight oversupply and refining capacity. So not just the upstream being impacted here. Certainly, also the refining sector.

Nathan Hunt: What are the implications of all this for the energy transition away from fossil fuels? I've read some commentators who say it's dead in the water now, and some who insist this will actually speed up the transition. What do you think?

Chris Midgley: Wow. Nathan, that's just is such a challenging question because just as we couldn't see coronavirus coming and see what, you know, huge impact it could have on the world, energy transition is another difficult one. If anything, we're sort of getting a dose of what it might feel like when we start to see demand declining, and so perhaps it gives a level of preparedness for that. But quite clearly now, energy transition, climate change is really not on the agenda of governments. And you know, we know governments tend to be more polarized than what they have to. They've got to focus on this one thing and that's the right thing. Right now. COP 26 has been delayed, so any chance of progress there are around a country's commitments to greenhouse gas emissions is going to be delayed. On the other hand, we may see some changing of habits. Might we see less people jumping on airplanes? Might we see more seminars being run virtually, more people relying on podcasts like this to interact rather than physically traveling to do it. So perhaps that will be a shift to where we do see a little bit less aviation, but we've got to remember, there's huge parts of the world which still don't have access, and  those huge numbers of people who will enter into the middle income classes and get access to flights and flying, etc. So that will offset some of that. We may see changes in trends of commuting and more people choosing to work from home and realizing that they can do that. But we have to remember that they're working from houses, which are less energy efficient than offices. In fact, over the next 30 years, we're going to double the housing stock to house the growing population, and very little of that will be new energy efficient buildings, sadly. We may have people on the counter side fearing mass transport because they don't want to catch germs. And the concern of another wave of a pandemic means that people are less happy to go on mass transport. They then drive their cars instead adding to more cars. So there's a lot of different things here, which it's just so difficult to put together. I think the other thing to look at here is the financial side of it. In the financial crisis, we bailed out the banks. We nationalized them. This is an economic crisis where we're going to nationalize all sorts of parts of industry and services. But what it means is, is that lots of money is being now dedicated to other sectors, and perhaps that leaves less money to invest in climate change in the short term, and therefore have policies that can make large changes there. So these things are going to be counterbalanced. I do think as fast as we've gone into a lockdown, I feel we're going to come out of lockdown. I think we're all going to want to breathe the air. Lots of people are going to want to go on a holiday. Lots of people want to visit their families and we all get to see a large bounce in  demand for oil once that happens. As things you know, may be sort of settled down. People might remember those days where air quality was lovely, even in Beijing and Shanghai because no one was driving. And perhaps they'll come back to say, we really need to do something about this, and we will again get some momentum around the energy transition. But right now, I think it's all really uncertain, and right now I think it's a little bit being put on the shelf for a while, while really the industry just has to adapt to this crisis that we're facing currently, which will take time for the economy to rebalance itself out of.

Nathan Hunt: I've been asking people for historical analogies to the current situation. Is there a historical analogy to what is happening in oil markets right now?

Chris Midgley: It's difficult to look at any event that has had as significant impact as this. 30% of the population having to change their behaviors. People liken it to the financial crisis, where, obviously in 2008 the Great Recession, demand collapsed dramatically, but there it was driven by industrial activity coming to halt, and we went through a long slow recovery out of that. This is not a financial crisis. This is an economic crisis. We may have one or two quarters of recession. But, currently the banks a well-capitalized. There's plenty of money being put into the economy, so we can come out of it, but it's just so deep and so dramatic. It's something that we've never experienced in such a short, sharp impact on energy demand as this. It's hard to bring parallels. You know, you have to go back and set the 1918 and the Spanish Flu to see something that had such a large impact, but we didn't have energy in the same shape or form then as we do today. So, this is a very different event, which is difficult to draw too many strong historical analogies to, and I think we are learning and adapting as we go along. And the big uncertainty to this and why I think it is difficult and why from an analogies perspective is, we really don't know how we're going to come out of this. There are differing views that by the fourth quarter we could see huge demand growth. Because we come out of this and everybody resumes normal activity, but we really don't know what the lagging impacts are going to be from all these people being unemployed, how fast they'll go back into employment, how fast people want to get back onto a plane to travel, etc. And so there's so many unknowns here. You can tight little strands of it. 9/11, all those flights getting canceled; it took time for people to get confidence to go back on. But I don't think any one event can describe what we're going through right now and be used as a parallel to try and understand how we are going to come out of this.

Nathan Hunt: Thanks for listening to The Essential Podcast from S&P Global. You'll find links in the show notes to Platts Research and Insights. To read all of our coverage of the oil crisis, visit


The Essential Podcast is produced by Molly Mintz.