Oil prices have plunged following the collapse of the OPEC/non-OPEC talks on production cuts and Saudi Arabia’s subsequent announcement that it will increase production from next month
The ministerial meeting of OPEC and its non-OPEC allies in Vienna on Friday 6 March had been considering a cut of 1.5 mn bpd to stabilise the market and alleviate the affects of the slump in demand as a result of the coronavirus, with 500,000 mn bpd of the cuts expected to come from non-OPEC states. However, the deal foundered when Russia declined to participate.
Brent crude dropped almost 10 per cent on Friday to around US$45, its biggest one-day loss since 2008, and plunged further to stand at around US$36 on Monday morning, sending stock markets into free all, following Saudi Arabia’s decision to raise production with the expiry of the current OPEC/non-OPEC agreement at the end of March. Saudi Aramco also announced sharp discounts in its selling prices to Asia.
Chris Midgley, head of global analytics, S&P Global Platts, commented, “The deep price cuts signal a move by Saudi Arabia away from market price to market share at a time when the market is already reeling from severe demand destruction as the result of both the warmest winter on record in the Northern Hemisphere, and the impact of the coronavirus to demand.
“Demand for the first quarter is likely to fall 2.4 mn bpd with a U-shaped recovery, which will not see demand growth move back closer to normal trend levels until the second half of the year where we may see a small rebound. In contrast, despite losing one million barrels per day of Libyan, 350,000 bpd of Venezuelan and 400,000 bpd of Saudi production, oil production has been up year-over-year. And it is closer to one million barrels per day, due to record US production and growth in other non-OPEC production such as Brazil, Guyana, Canada and North Sea, plus 400,000 bpd of OPEC non-compliance from UAE, Iran and Nigeria.
“With increasing number of reports of the Coronavirus across the world, demand continues to look uncertain. On the supply side, a market share strategy could see Saudi Arabia production jumping 800,000 bpd to around 10.5mn bpd, which along with the other OPEC countries throwing off their gloves could see OPEC and Russian supply adding well over an additional one million bpd to the market.
“We find ourselves in unprecedented conditions……While low prices will test Saudi fiscal balances, they have the lowest cost barrels and with low debt can pull on sovereign reserves and take the pain. Russia may simply allow the Rouble to slide in order to sustain flow of Roubles into their economy, while US Shale will certainly take the brunt of the pain.
“Without any positive signals on demand or evidence of any supply agreements, the market has only one way to slide.”
Simon Watkins, independent oil analyst and author, added, “It is extremely likely that oil prices will continue to fall, as we have now entered a full-scale oil price war involving the top three oil producers - the U.S., Russia and Saudi Arabia – with huge new volumes of oil coming into the market that will only add to its existing supply overhang and to the soft demand profile resulting from the effects of the coronavirus.”
Meanwhile, the IEA has revised down its forecast for global oil demand in 2020 by around one million barrels a day, as the impact of the coronavrius spreads around the world, constricting travel and broader economic activity.
“The coronavirus crisis is affecting a wide range of energy markets – including coal, gas and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels,” said Dr Fatih Birol, the IEA’s executive director.
“This is especially true in China, the largest energy consumer in the world, which accounted for more than 80 per cent of global oil demand growth last year. While the repercussions of the virus are spreading to other parts of the world, what happens in China will have major implications for global energy and oil markets.”
The IEA now sees global oil demand at 99.9mn bpd in 2020, down around 90,000 barrels a day from 2019. This is a sharp downgrade from the IEA’s forecast in February, which predicted global oil demand would grow by 825,000 bpd in 2020.
The short-term outlook for the oil market will ultimately depend on how quickly governments move to contain the coronavirus outbreak, how successful their efforts are, and what lingering impact the global health crisis has on economic activity, the IEA says.