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IEA: Oil in recovery, but not enough

A new report shows that oil prices continue to recover off the post-COVID lows, but it may not be enough to help with key energy investment for 2020.

Higher demand and production cuts have seen West Texas Intermediate (WTI) go from a low of -$40.32 to $32.96. The price recovery will help stabilize financial markets but according to a report released by the International Energy Agency (IEA), it may not be enough to stop a steep decline in energy investment.

WTI charged into the new year above $60 a barrel but the price steadily deteriorated as the COVID virus shut down most of China in January. By the end of February, as the virus spread worldwide, prices began to rapidly decline on weakening demand.

The normally recalcitrant OPEC alliance, however, has managed to cut supplies, helping boost prices.

OPEC’s heavyweights,” reports oilprices.com, “including Saudi Arabia, the United Arab Emirates (UAE), and Kuwait, have pledged more cuts on top of those they have promised in the deal, and even Russia is said to have been really trying to comply with the OPEC+ agreement this time, unlike in previous pacts.”

Meanwhile demand from China has shown steady recovery.

“In a remarkable turnaround after Chinese demand crashed by about 20% as the country went into lockdown in February,” reports Bloomberg, “consumption of gasoline and diesel has fully recovered as factories reopen and commuters drive rather than use public transport, according to the people, who asked not to be named because they aren’t authorized to discuss the matter publicly.”

However, the IEA is warning that investment in energy will drop $400 billion in 2020 despite cautious optimism in some quarters over oil demand.  

“2020 is now set to see the largest decline in energy investment on record,” says the IEA.org, “a reduction of one-fifth – or almost USD 400 billion – in capital spending compared with 2019.”

The power sector will be affected less than the oil and gas sector, but consumption, the key long-term determinant in energy investment, will only return slowly.

Because of the long lead times involved in capital projects for energy, the IEA warns that the effects of the decline in investment may not be felt for years.

Two consequences of weak energy prices may have strong public policy implications.

“Renewables generally do not yet offer all the characteristics that investors are looking for in terms of market capitalization, dividends or overall liquidity,” says the IEA, thus capital investment will be more or less hobbled for renewables.

Further, developing countries are more dependent on energy revenues than advanced economies because energy is more often a government-owned or sponsored enterprise.

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