This time it’s different. The ongoing oil shock has a precise origin: the new SARS-COV-2 coronavirus pandemic. During the 2007-2008 subprime mortgage crisis, the collapse of international trade was linked to the fear of a crack in the financial system. In this case, the lockdowns in Asia, Europe, Africa, Oceania, North America and South America are having a greater magnitude. And the volatility of the oil price reflects this new dimension. Italy is not immune to contagion. The consequences can be long-term. However, there is a clear opportunity: once the storm is over, the transition to sustainable energy sources can be completed.
In mid-February both West Texas Intermediate (WTI), Texas crude, and Brent, North Sea crude, were above $50 per barrel. The explosion of the first Italian coronavirus outbreak, in Codogno, in the rich region of Lombardy, made volatility begin. In a few weeks, the price of WTI oil has fallen below $20 per barrel. The minimum in 17 years. The reason is also to be found in the trade conflict between Russia, Saudi Arabia and the USA. Instead of slowing down daily production, Riyadh has decided to increase it. More barrels on the market has resulted in lower prices, at the lowest level since the 1991 Gulf War. Saudi Arabia has attempted to reopen dialogue with Russia, but the oil war has hit Washington hard. In fact, American shale oil is experiencing its darkest period. It turned out to be less efficient than previously thought.
How does Italy find itself in this scenario? The country has no energy independence. This is good and bad at the same time. With low prices, Italy can obtain supplies at reduced prices and increase national reserves. But storage capacity is limited. And the lockdown of the most productive regions – Lombardy, Veneto, Piedmont, Emilia-Romagna – does not help the use of hydrocarbons for the transport of goods. The result is that the main national player, ENI, has had to limit its operations. ENI said most of its oil refineries in Italy were working at around 60% of their capacity as the novel coronavirus pandemic continues. The Italian oil & gas company remarked that its biggest refinery, Sannazzaro, in northern Italy, was running at around 50% of capacity since it was also impacted by planned maintenance work. Furthermore, with the reduction in fuel demand, ENI could be more affected than many other companies, considering that it supplies around 4,000 gas stations nationwide. “ENI is monitoring developments in the market so as to be able to make any eventual adjustments to supply,” it said. The biggest problem will be if lockdowns last beyond the beginning of May. The hibernation of the national economy might lead to a complete stop of the production of crude oil and natural gas.
The baseline scenario is not good. According to Goldman Sachs analysts, “the substantial deterioration in oil demand is already starting to overwhelm local pipeline and storage capacity, leading to collapsing inland crude prices. With saturating logistical infrastructure, we expect that production shut-ins will be necessary to rebalance inland oil markets.” This implies that Italy will also be affected. The lockdowns in Italy have in fact also reduced the production capacity of factories considered “non-essential”. Therefore, the reduction in demand for crude oil for industrial use could last up to the third quarter. The recession is not a matter of “if”, but of “how much”. How long and deep it will be, to be precise. Financial analysts fear that the recession curve may be a very large U, not a V like in the most dynamic economies, like China or in developing countries. In other words, a steep decline in Gross Domestic Product (GDP) followed by long-term stagnation.
Italy is more vulnerable than many other EU member states. The scenario of a U-shaped recession is not a remote hypothesis. In such a contest, the Italian energy market will also suffer. Less consumption, less goods transported, less fuel used, less profits for national energy companies. Despite this, it is legitimate that in 2021, when the pandemic will be under control, a greater implementation of green energy strategies will proceed. The potential of the Environment, Social, Governance (ESG) market is wide in Italy. From solar to wind, passing through water, Italy can exploit the bursting of the SARS-COV-2 bubble to start again. In a cleaner and more sustainable way. The virus would be the real trigger for a paradigm shift.
