Australia / Analyst Insights
Spillover: Oil and Gas Market Volatility Due to COVID-19 Pandemic

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by James Thomson
Nov 18 2020

It has been a volatile year for global oil and gas markets, with the COVID-19 pandemic contributing to wild fluctuations in demand conditions and prices. These conditions have had a significant impact on upstream operators in the Oil and Gas Extraction industry and Petroleum Exploration industry. Transport activity accounts for over half of global oil demand. Consequently, when travel restrictions were introduced in early 2020 in an effort to contain the spread of COVID-19, demand for fuel fell sharply. This sharp contraction in demand significantly contributed to oil and gas prices plummeting. The International Energy Agency expects global oil demand to fall by 8.4%, from 100.1 million barrels per day in 2019, to average 91.7 million barrels per day in 2020.

Producers’ response

Sharp price declines and deteriorating demand conditions prompted the Organisation of the Petroleum Exporting Countries and other major oil producers, including Russia, Mexico and Malaysia (collectively known as OPEC+) to cut oil production to balance supply and demand conditions and stabilise prices. OPEC+ cut oil production by 9.7 million barrels per day in May 2020, before scaling back cuts to 7.7 million barrels per day in August as demand conditions stabilised. The group is scheduled to further reduce production cuts in January 2021. However, with COVID-19 case numbers rising again in parts of the world, production cuts may remain in place.

Impact on domestic operators

With exports accounting for over 80% of revenue for operators in the Oil and Gas Extraction industry, global price volatility is expected to have a significant impact on Australian producers in 2020-21. Liquified natural gas (LNG) exports represent the largest revenue source for industry operators. LNG contract prices typically follow oil prices with a lag. As such, the impact on LNG markets is expected to be more severe in 2020-21.

  • According to the Office of the Chief Economist, the value of Australia’s LNG exports is expected to decline by 34.5% in 2020-21, to $31.2 billion.
  • The decline is projected to be largely driven by price weakness, with export volumes only expected to fall by 4.7%, to 75.6 million tonnes.
  • LNG export prices are expected to fall by 31.2% in 2020-21.

In response to price weakness and uncertain demand conditions, operators across the oil and gas sector are expected to significantly reduce capital expenditure and delay investment decisions for major projects. As a result, expenditure on petroleum exploration is expected to fall sharply in 2020-21, with revenue for the Petroleum Exploration industry projected to decline by 23.0% over the year. Major oil and gas producers around the globe have also revised their projections downwards for long term oil prices. The reduction of these price assumptions, which underpin the value ascribed to oil and gas assets, has led to significant asset write-downs among major operators across the sector. For example, in July 2020, a review of Woodside Petroleum’s assets led to a US$2.76 billion reduction in the value of its oil and gas properties and a US$1.16 billion reduction in the value of exploration and evaluation assets. Other companies have faced similar reductions across their global portfolios.


The short-term outlook for the Oil and Gas subdivision looks uncertain, with parts of Europe and the United States again reporting high numbers of COVID-19 cases. Demand for oil and gas may come under renewed pressure as countries re-enter various states of lockdown. However, OPEC+ has shown an ability to effectively enforce production cuts, which should provide some support for oil and gas prices in the short term. In the medium- to long-term, as global demand conditions stabilise, Australian LNG exporters are well placed to meet growing demand for LNG in Asia. In October 2020, Total became the second company to make a carbon neutral LNG shipment from Australia through the use of carbon offsets. With China announcing plans to reach net-zero emissions by 2060, and other countries in the region making similar pledges, the use of gas as a transition fuel towards carbon neutrality is anticipated to support demand for Australian producers.


IBISWorld reports mentioned in this release:

Oil and Gas Extraction industry in Australia
Petroleum Exploration industry in Australia
Woodside Petroleum Ltd