Commercial marine faces impact of oil price collapse
This is the first weekly update from our commercial marine team on how the Covid-19 pandemic is affecting our clients and the sector as a whole.
We’re working closely with our customers and partners across the commercial marine sector as they focus on the challenges of the Covid-19 pandemic. The industry inevitably faces a significant impact as oil prices tumble amid heavily reduced demand and excess supply. As of today, the price of Brent Crude stands at around $34 a barrel, less than half its value a year ago, though prices have been as low as $23 in recent weeks.
Brazil’s Petrobras has now responded with a cut in production of 200,000 barrels per day; it’s the first major state-run oil company to significantly reduce output. However, with demand worldwide expected to fall by more than 12 million barrels per day – more than 10% of daily demand – during this global pandemic, Petrobras’s initiative is relatively small scale in the overall scheme of things.
The good news is that markets have responded positively to the intervention, amid an expectation that other providers will follow suit. Nevertheless, the outlook remains uncertain for the 150 or so UK companies focused on the Brazilian oil, gas and energy sector supply chain – and those businesses active in the sector’s oil supply chain throughout the world.
One other challenge now facing the industry is that oil storage terminals will very shortly reach capacity. Given that production has to continue in order to keep oil heads open, there is growing concern about where excess oil will be stored.
Manufacturing data begins to tumble
More broadly, the effects of the pandemic on manufacturing are now beginning to show up in sector data. The IHS/Markit Purchasing Managers Index, based on a survey of business leaders in the sector, fell to 47.8 in March, a three-month low and down from 51.7 in February. Any reading below 50 indicates a majority of respondents have experienced a contraction in activity.
Given that the UK government’s response to Covid-19 did not accelerate until the second half of the month, with the Prime Minister introducing lockdown measures on 23 March, April’s figures are likely to be significantly worse. Manufacturers across the UK are now focused on liquidity and very careful cash flow management. Several listed engineering companies have now announced they are cancelling planned dividends in order to conserve cash and we expect more to follow this example.
The experience of manufacturers in the UK mirrors that of their counterparts in other parts of the world. Factory activity contracted across most of Asia in March as the pandemic paralysed supply chains. Significant falls in activity in Japan and South Korea overshadowed a modest improvement in China where authorities have felt able to relax some of the restrictions as Covid-19 cases have slowed. With the number of countries around the world imposing their own lockdown regimes, we now expect the impact of the pandemic on global supply chains to be more enduring than many originally expected.
- To discuss how we can help your business during the Covid-19 pandemic, please contact issinsights@santander.co.uk