ENERGY

The energy sector is seeing its biggest upheaval since the 2008 Global Financial Crisis, if not worse. In the oil sector, severe demand loss coincides with activity on the supply side that is unprecedented in terms of harm to the industry. According to our estimate, the world could see 6mbpd of global excess supply in 2020. As a consequence, our central oil price scenario is for USD 41/bbl on average in 2020 with significant risk and deviation around that central point. At current oil prices, sub USD 30/bbl, large parts of the industry are unprofitable. The industry has reacted by aggressively cutting shareholder payout, cutting costs and reducing capex. At this point, a collective USD 25bn of capex cuts has been announced and we expect more to come. For a number of companies, that may not suffice and we anticipate rising insolvencies. Oil sector insolvencies are strongly correlated with crude prices, and the last time oil prices saw a significant decline, albeit much less pronounced than the current one in terms of lows reached, in 2014/15, the industry saw a spike in insolvencies. The fact that, in contrast to large well capitalized sector constituents, a great number of junior and independent oil companies are highly leveraged, and some have fully exhausted available credit lines. This is particularly the case in the US.

The power sector is in good shape and returning to growth. It should see benefit of restructuring and recent transformative transactions coming through and drive earnings growth. The sector should grow earnings by 4.5%y/y in 2020 (source: Bloomberg, EulerHermes, Allianz Research). There will be impact from industrial demand reduction relating to the Covid-19, only a fraction of which will be counterbalanced by increased residential demand. Nevertheless, in our view, the dent will be compensated by positive efficiency and price spreads.