Page 4 - MEOG Week 11

MEOG Commentary MEOG
Doom and gloom abound
as oil prices tumble and
virus spreads
Amid a major worldwide health crisis a dramatic fall in oil prices is contributing to depressed economies and difficult times lie ahead.
markets
What:
Oil prices have plummeted worldwide.
Why:
Following the failure of the OPEC+ talks the brakes have been taken off oil production.
What next:
Future oil prices and production is uncertain, but predictions have been made.
AmiD the current worldwide crisis surrounding the spread of the coronavirus (COViD-19) the breakup of the OPEC+ agreement on oil prices has somewhat slipped below the radar; but within the energy industry the failure to agree on the level of oil to be produced from April 1 onwards has major repercussions.
After failing to get Russia’s agreement to share output cuts of 1.5mn barrels per day (bpd) of oil, Saudi Arabia decided to maximise its oil pro- duction and directed the state oil company Ara- mco to increase its total possible oil production, or capacity; Saudi Arabia is working to flood the market after another oil producer, Russia, refused to agree to oil production cuts.
Saudi Aramco initially said it would increase its oil production to 12.3mn bpd starting in April. That is 300,000 bpd more than Aramco’s current production. it then amended this to “up to13mnbpd”.
Saudi Arabia had been producing around 9.8mn bpd, which was in line with an agree- ment among a number of oil producing nations, including Russia. The cuts were an attempt to stop the oversupply in the market that had pushed prices down.
The effect of this increase in oil being pro- vided to the market (followed by a similar deci- sion in Abu Dhabi – see later article) was to push down oil prices dramatically. Brent crude fell from $52 at the beginning of march to finish at $31.63 on 16 march, having earlier dropped below $30. Bearing in mind that Brent was standing at almost $70 in January, the dramatic change is all too evident.
US President Donald Trump’s has responded to the price crash by pledging to fill strategic oil reserves in the world’s largest oil consumer “to the top” and the US energy sector is a significant factor in the present market turmoil.
it is considered that the flooding of the mar- ket with additional oil is said to be partly to hit
the US shale industry, which has been a deter- mining factor in the oil market by producing and exporting shale oil at prices which undercut the traditional suppliers of the middle East and elsewhere.
it is most likely that the US shale industry will come under pressure but it is not clear how low the price will have to go to have a major effect. in the previous instance of Saudi oil flooding the market, US shale producers were able not just to break even at price points above $30 per barrel of Brent but also to make decent profits at points above $35-37 per barrel.
Experts say it appears Saudi Arabia hopes to put pressure on Russia by controlling market share in a price war and in recent days the Saudis have offered special deals to European buyers of Russian oil – perhaps to kick back against mos- cow’s decision not to support the OPEC deal. SourcespreviouslytoldReutersthatSaudiAra- bia is also seeking to replace Russian oil custom- ers with Chinese and indian buyers.
Tanker rates soared as Saudi Arabia provi- sionally chartered around 31 supertankers to carry the extra oil.
Russia may be looking at a breakeven oil price as low as $40 per barrel and the US and Russia can probably afford to sit back for much longer than Saudi with oil prices at or below $40 per barrel and, quite aside from the absolute level of oil price, both benefit in key broader ways as well.
With all of this happening it would be help- ful to look at some possible pointers to future demand and the price of oil.
Oil demand has been revised downward sev- eral times since the start of the year thanks to the devastating impact of the coronavirus. With the number of coronavirus cases in China - the world’s largest oil importer - seemingly levelling off in recent days, there was a view that the worst of the oil demand shocks may have passed.
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w w w . N E W S B A S E . c o m Week 11 18•March•2020