The current reduced demand for oil and refined products as a result of national lockdowns in South Africa and across sub-Sahara Africa could last at least six months.
This is a prediction from Shirley Webber, Absa Corporate and Investment Banking head of natural resources, who says national shutdowns have affected and reduced demand for both fuel and refined products, primarily because of less traffic on the roads, and no passenger flights being allowed following the closure of many international borders.
Oil companies have not been able to make up for this reduced demand by selling to customers operating in essential services as large sectors of economies were shut down because of the lockdowns.
“We expect that this reduced demand scenario will persist for some time with pre-Covid consumption levels being reached at the back end of 2021. How oil companies and traders will survive during this period will largely depend on their operating models,” Webber says.
She says the cashflow of oil companies has as a result been affected by reduced capacity at refineries because people have been buying less fuel and oil products due to restrictions on travel in many countries. In response, the oil majors have had to reduce refinery their capacity to save costs and preserve cashflow by between 25% and 40%. Some had also slashed their capital expenditure budgets by as much as 30%.
Webber says one of the key learning lessons of the COVID-19 induced shutdowns for oil and mining companies is the importance of risk management, especially when it comes to hedging strategies to protect their balance sheets against currency and commodity price volatility.
“For example, we have seen the oil sector hedging their production at between $60 and $90 a barrel in some instances. Had they not done that, they would have been in serious trouble with the current price which has fallen significantly and unlikely to recover for a while based on current trends and developments,” she says.
Webber says another important lesson is to ensure access to adequate liquidity facilities on the right commercial terms, such as tenor. Absa has been engaging with its clients to understand their liquidity requirements and how they are managing under the current stressed economic conditions. She says reduced demand can put pressure on cashflows and balance sheets, which emphasises the importance of a company having ready access to a standing facility which can be used during times of trouble.
“What is important is that the terms of such facilities have to be favourable and not too onerous on the business because there is balance you need to strike in order to preserve both the business and your ability to operate under stressed scenarios such as these we are witnessing globally,” she says.