The spread of Covid-19 has caused volatility across financial markets in recent months, but the energy sector has a second crisis to deal with.

Just as the coronavirus outbreak was intensifying around the world, talks broke down between Russia and OPEC (Organisation of the Petroleum Exporting Countries) over limiting oil production. This led to a dramatic fall in crude oil prices, from over $50 per barrel at the start of March to nearer $20 by the end.

Oil prices then took a further tumble in April, even turning negative for a brief period as contracts for May delivery expired. Unlike Brent oil, contracts for West Texas Intermediate – the US benchmark - are settled by physical delivery, with the owner of the contract on the day of expiry receiving the barrels of oil. As the May contract approached expiry, there was a rush to offload these holdings to avoid having to incur storage costs. (For more on this, see Problems in store: what’s going on with oil prices?)

The recent negative prices are therefore largely due to technical factors in the North American market. Longer term oil prices are more critical for oil companies and these have remained positive.

Nevertheless, investors have been attempting to weigh up the magnitude and duration of the Covid-19 impact on global trade and demand for oil. The sharp price drop has contributed to concerns about the prospects of a liquidity freeze and widespread credit difficulties for companies operating in the sector.

But this isn’t the first time in recent years that oil companies have had to deal with a sharp oil price shock.

Many oil majors have become more efficient

When oil prices crashed back in 2014, major oil companies like BP and Royal Dutch Shell retrenched. They cut costs aggressively, sold off assets and streamlined their operations to protect themselves from future market slides and remain profitable at lower oil prices.

This meant they became more efficient – generating more cash when oil prices averaged around $65 a barrel over the past two years than when they were at $100.