With a scheduled meeting of major oil producers delayed this week, the war for oil market share among those producers continues. At the same time, the global oil market is experiencing a massive demand shock, as transportation slows to a near standstill amid coronavirus mitigation measures. Charter fees for very large crude carrier (VLCC) have surged by 3 times and onshore oil tankers are now charging a higher premium for storage fees.
However, we think the oil market is not about the supply and demand of oil.
It's about the supply and demand of the capital. There is a sharp reduction of the capital to the sector. Equity investors are now placing a higher premium on energy companies and debt investors are requesting a higher return from the bond issued by energy companies. Another time bomb that we will be seeing will be the downgrade of energy companies' bonds to junk bond grades, which will shut the door off for them to raise funds from sovereign wealth funds and pension funds.
With all these ripple effects, we will likely see substantial consolidation and rationalization of the industries and only companies with the strongest balance sheet or the most efficient producers are able to survive this catastrophe. In our view, oil will experience another round of 10 years bull run, just like what we experienced at the starting of millennial after all things had settled down.