The current reduced demand for oil and refined products as a result of national lockdowns in South Africa and across sub-Saharan Africa could persist for at least six months, Absa Corporate and Investment Banking (CIB) natural resources head Shirley Webber says.
She explains that national shutdowns have affected and reduced demand for both fuel and refined products, primarily because of less traffic on the roads and no international passenger flights being allowed.
Oil companies have not been able to make up for this reduced demand.
“We expect this reduced demand scenario will persist for some time with pre-Covid-19 consumption levels [only] 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 adds that cash flow of oil companies has, as a result, been affected by reduced capacity at refineries because people have been buying less fuel and oil products owing to restrictions on travel in many countries.
In response, the oil majors have had to reduce their refining capacity by between 25% and 40% to save costs and preserve cash flow.
Some also slashed their capital expenditure budgets by as much as 30%.
Webber says one of the key 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.
Another important lesson is to ensure access to adequate liquidity facilities on the right commercial terms, such as tenor, she adds, noting that Absa has been engaging with its clients to understand their liquidity requirements and how they are managing under the current stressed economic conditions.
“Reduced demand can put pressure on cash flows 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,” she elaborates.