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How Oil Prices Went Subzero: Explaining the COVID-19 Oil Crash

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How Oil Prices Went Subzero: Explaining the COVID-19 Oil Crash

Explaining the Historic COVID-19 Oil Price Crash

The Great Lockdown continues to turn markets on their head.

Last week, we dug into the unprecedented number of initial jobless claims coming out of the United States, which topped 22 million in a period of four weeks.

It’s just days later, and we already have our next market abnormality: this time, traders were baffled by West Texas Intermediate (WTI) crude — the U.S. benchmark oil price — which somehow flipped negative for the first time in history.

How is that possible? And how does it tie into the COVID-19 oil price crash in general?

Setting the Geopolitical Stage

Oil is a geopolitical game, and big price swings always come with a geopolitical undercurrent.

This particular story picked up steam in February as OPEC+ producers tried to negotiate a production cut, amid concerns that COVID-19 could impact demand. Russia walked out on these meetings, and Saudi Arabia responded by undercutting oil prices by $6-8 per barrel.

The world went into lockdown, energy demand dissipated, and oil producers continued to pump at will. Then on April 9th, nearly a full month after COVID-19 was declared a pandemic, Russia and Saudi Arabia finally settled their differences.

However, this truce came too late — prices had already fell about 60% from February highs.

How Prices Went Subzero

Up until recently, this was a fairly run-of-the-mill oil price crash — but then prices suddenly sunk below zero, with May futures for WTI oil closing at -$37.63 on April 20th.

For the first time in history, producers were willing to pay traders to take oil off their hands. This oddity is partially a function of the particularities of futures contracts:

  • Buyers Wanted (At Any Cost!)
    Futures contracts normally rollover to the next month without much happening, but in this case traders saw the May contract as a “hot potato”. No one wanted to be stuck taking delivery of oil when the world is awash in it and the country is in lockdown.
  • A Time and a Place
    Oil futures contracts specify a time and place for delivery. For WTI oil, that specific place is Cushing, Oklahoma. With most storage capacity booked already, taking physical delivery wasn’t even an option for many players.

In other words, sellers outnumbered buyers by a crazy margin — and because oil is a physical commodity, someone has to ultimately take the contract.

At time of publishing, the May contract and spot prices have “rebounded” to about $10. The June contract is slightly higher, at $13.

“Never before has the oil industry come this close to testing its logistics capacity to the limit.”

– International Energy Agency (IEA), Oil Market Report for April

Overcoming the Supply Glut

What do you do when oil is practically free?

You store as much of it as you can, and hope that at some point you can sell it for more.

Unfortunately, everyone has the exact same idea, and as a result there is a historic glut that is filling up the world’s storage capacity both on land and at sea:

  • In March, it was estimated that 76% of the world’s available oil storage capacity was already full.
  • A record-setting 160 million barrels of oil is being stored on tankers at sea, according to Reuters.
  • The cost of renting an oil supertanker has gone through the roof. It’s jumped from $20,000 per day to $200,000-$300,000 per day, according to Rystad Energy.

It remains to be seen how fast the transportation industry will recover in a post-COVID-19 world, but for now the outlook for all oil producers is grim. The continued fallout will not only affect industry, but also the countries that rely on oil exports to balance their budgets.

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Energy

Connected Workers: How Digital Transformation is Shaping Industry’s Future

This graphic explores the role connected workers play in achieving successful digital transformation and identifying new growth opportnities.

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Connected Workers: Shaping the Future of Industry

Digital transformation has upended businesses on a global scale, and no industry is immune from its powerful effects.

New technologies and enhancing customer experience are key drivers for companies investing in digital transformation, but the most important reason for prioritizing this shift is that it will allow them to leverage entirely new opportunities for growth.

However, with the speed of digital transformation accelerating at a furious pace, companies need to quickly adapt their working environment to keep up. This graphic from mCloud unearths the origins of the connected worker, and explores the potential applications of connected devices across industries.

The Rise of the Connected Worker

The mass adoption of smart devices has sparked a new wave of remote work. This type of working arrangement is estimated to inject $441 billion into the global economy every year, and save 2.5 million metric tonnes of CO2 by 2029—the equivalent of 1,280 flights between New York and London.

However, flexible or remote working looks different depending on the industry. For example, in the context of business services such as engineering or manufacturing, employees who carry out different tasks remotely using digital technologies are known as connected workers.

The term is not a one-size-fits-all, as there are many different types of connected workers with different roles, such as operators, field workers, engineers, and even executives. But regardless of an individual’s title, every connected worker plays a crucial role in achieving digital transformation.

Real Time Data, Real Time Benefits

When workers are connected to assets in real time, they can make better, more informed decisions—ultimately becoming a more efficient workforce overall. As a result, industries could unlock a wealth of benefits, such as:

  • Reducing human error
  • Increasing productivity
  • Reducing dangerous incidents
  • Saving time and money
  • Monitoring assets 24/7

While connected workers can enhance the potential of industries, the tools they use to achieve these benefits are crucial to their success.

Connected Worker Technologies

A connected device has the ability to connect with other devices and systems through the internet. The connected worker device market is set for rapid growth over the next two decades, reaching $4.3 billion by 2039. Industries such as oil and gas, chemical production, and construction lead the way in the adoption of connected worker technologies, which include:

  • Platforms: Hardware or software that uses artificial intelligence and data to allow engineers to create bespoke applications and control manufacturing processes remotely.
  • Interfaces: Technologies such as 3D digital twins enable peer-to-peer information sharing. They also create an immersive reflection of surroundings that would have otherwise been inaccessible by workers, such as wind turbine blades.
  • Smart sensors and IoT devices: Sensors that monitor assets provide a more holistic overview of industrial processes in real time and prevent dangerous incidents.
  • Cloud and edge computing: Using the cloud allows workers to communicate with each other and manage shared data more efficiently.

Over time, connected devices are getting smarter and expanding their capabilities. Moreover, devices such as wearables are becoming more discreet than ever, and can even be embedded into personal protective equipment to gather data while remaining unobtrusive.

Real World Applications

With seemingly endless potential, these devices have the ability to provide game changing solutions to ongoing challenges across dozens of industries.

  • Building Maintenance and Management
    Facility managers can access real time information and connect with maintenance workers on site to resolve issues quickly. Building personnel can also access documentation and remote help through connected technologies.
  • Task Management
    Operators in industrial settings such as mining can control activities in remote locations. They can also enable field personnel to connect with experts in other locations.
  • Communications Platform
    Cloud-based communication platforms can provide healthcare practitioners with a tool to connect with the patient, the patient’s family and emergency care personnel.

By harnessing the power of artificial intelligence, the Internet of Things, and analytics, connected workers can continue to revolutionize businesses and industries across the globe.

Towards a More Connected Future

As companies navigate the challenges of COVID-19, implementing connected worker technologies and creating a data-driven work environment may quickly become an increasingly important priority.

Not only is digital transformation important for leveraging new growth opportunities to scale, it may be crucial for determining the future of certain businesses and industries.

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Energy

Tracking the Growing Wave of Oil & Gas Bankruptcies in 2020

Dropping crude prices and a worsening pandemic have led to a growing wave of energy bankruptcies. Here’s what that fallout looks like.

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The Growing Wave of Oil & Gas Bankruptcies in 2020

2020 hasn’t been kind to the energy sector, and a growing wave of energy bankruptcies has started to build.

After a difficult year marred by rising geopolitical tensions in the Middle East and crude prices in the $50-60 per barrel range, analysts warned that the energy sector needed a strong recovery to offset a rising (and expiring) mountain of debt.

Instead, the oil patch has seen one bombshell after another, and the impacts are adding up.

Fueling the Wave’s Growth

The new year opened with a U.S. attack on a top-ranking Iranian general in Baghdad, followed by an Iranian counterattack on two bases in Iraq that hosted U.S. military personnel.

Then, the energy industry worried that the Organization of the Petroleum Exporting Countries (OPEC) wouldn’t renew its production deal with non-member countries, causing increased production and negative pressure on crude prices.

All the while, the threat of COVID-19 grew and started to spread. In March, the new coronavirus hit markets hardest, right as the OPEC+ deal collapsed. Russia and Saudi Arabia subsequently flooded the markets with cheap oil, starting a price war to drive out competition.

What developed was the perfect storm of nonexistent demand matched up against oversupply. Crude prices plummeted and hit a historic sub-zero low on April 20th, with futures for West Texas Intermediate (WTI) Crude closing at -$37.63.

The Wave’s Initial Damage

Now, following a renewed OPEC+ deal limiting production agreed upon on April 9th and slowly restarting economies driving up crude demand, prices have started to tick up.

Unfortunately, the damage has already been done and will take a long time to recover. By charting the sector’s bankruptcies over the first half of 2020—tracked by law firm Haynes and Boone, LLP for the U.S. and Insolvency Insider for Canada—we can see the wave start to swell:

Company TypeQ1 BankruptciesQ2 BankruptciesTotal (H1 2020)
Oil & Gas Producer71825
Oilfield Services71219
Midstream Services213
Total163147

For oil and gas producers, the second quarter of 2020 saw 18 bankruptcies, the highest quarterly total since 2016.

So far, they’re largely centered in the U.S., which saw a boom of surface-level shale oil production in the 2010’s to take advantage of rising crude prices. As prices have dropped, many heavily leveraged companies have started to run out of options.

Company TypeQ1 Total DebtQ2 Total DebtTotal (H1 2020)
Oil & Gas Producer$1.4 billion$29.2 billion$30.7 billion
Oilfield Services$10.8 billion$13.2 billion$24 billion
Midstream Services$0.2 billion$0.2 billion$0.5 billion
Total$12.5 billion$42.7 billion$55.1 billion

The biggest victim in the first half of 2020 was Chesapeake Energy, a shale giant that declared bankruptcy on June 28 with more than $9 billion in debt.

Canada has also seen an uptick in energy bankruptcies, especially after facing years of stiff competition from U.S. shale producers. However, the number of cases in Canada is far fewer than in the United States.

One reason is that companies staved off bankruptcy or receivership in four of the seven insolvency cases in Canada since January 2020, at least temporarily. Instead, they are seeking protection under the country’s Companies’ Creditors Arrangement Act, giving them a chance to restructure and avoid insolvency.

A Prolonged Fallout

Another reason for the discrepancy in bankruptcy numbers is timing. The energy sector faced its biggest challenges in 2015/2016, causing many companies to take on debt.

Unfortunately, much of that debt is starting to expire, or becoming too difficult to pay off in the current market conditions.

That’s why, despite the wave of bankruptcies caused by COVID-19 gaining steam, the wave will continue well into 2020 and likely beyond.

July has already seen more companies declaring bankruptcy or seeking creditor protection. The question is, how many more are waiting to surface?

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