Market Overview

19 March 2020

Oil Well Strikes Down

HS Markit forecasts the biggest crude surplus ever in the first half of 2020 amid a mind-blowing drop in demand and a price war going on in the oil market between Saudi Arabia and Russia. According to the forecast, the oil excess could augment between 800 million and 1.3 billion bpd.

Emotional price wars in the oil market and plummeting demand may lead to irrational behaviour by the markets and further decline in prices. It may be considered that the market is pricing in a possible future drop in demand of four to ten % of the total demand, according to the HS Markit. Brent crude prices already crashed by 57% from $60 a barrel on February 20 to $26 on Thursday. Consequently, the price drop is 600% ahead of the most pessimistic forecasts for the surplus for demands that are not even in place at the moment, but could well become a reality. This has caused panic and an excessive drop that has nothing to do with the balance of supply and demand.

However, such an inconsistency could last even longer and may pressure oil prices to the $20-$25 range in April. Saudi Arabia and some other OPEC countries, are already offering oil with a delivery in April within this price range. These prices will probably remain the same next month amid plans to increase oil production by four million bpd in the 2Q, 2020. OPEC+ has evolved into its antipode - OPEC- regarding oil prices.

Nevertheless, there are some reasons to confront such scenario. Exporters may cease their price wars and the coronavirus may be contained within Europe, just as it was contained within mainland China. China could increase its oil demand and some of the US shale producers may leave the market due to extremely unfavorable low prices. Shale oil producers could allow the price to be at the minimum of $30-32 a barrel of WTI crude, in order for it to stay afloat.

Such conditions are not a virtual reality as it may sound now. Too low prices existing in the market are not fruitful to anybody. The Republicans have called on US President Donald Trump to stop imports of crude oil from Saudi Arabia and Russia so that the price war may halt the expected rise in oil production. The Saudis consider the US as their allies and it would be quite difficult just to ignore such calls. This could be a reason for Riyadh to save their face in order to reconsider their plans.

So, should these reasons turn into a reality the rebound of oil prices to a wider range of $25-$40 per barrel, may be a likely development. This is much more consistent to real balance of the supply and demand, even if the surplus in the market is considered.


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