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On 19 March 2020, the crude oil prices rebounded, surging ~20% from the prolonging days of constant decline in the prices. Both the European and American economies are announcing aids and stimulus packages to minimise the impact on their economy. The US trade oil benchmark WTI (Western Texas Intermediate) prices recovered to US$21.69 a barrel as of 2:15 PM AEDT. The European benchmark Brent crude oil is trading at $25.06 a barrel as of 2:15 PM AEDT.
WTI Crude Oil Benchmark Price Chart Source: Refinitv Eikon
In the recent move, the European Central Bank announced a US$820 billion emergency bond purchase scheme to break the circling economic crisis.
The quantum of impact due to coronavirus outbreak has continued to grow across all geographies except for China, the origin to the global crisis, where only 13 new cases were reported on 17 March.
Also Read Demand for Crude Oil & Distillate Products Down: Is China to blame?
Mexico’s Maya & Pemex
Mexican heavy crude benchmark is trading at the lowest levels since 2002. The national oil company popularly called as Pemex modified the K factor, which is used to adjust the monthly pricing formulas for the crude oil which is shipped to America, Europe and other regions.
The extremely low prices of crude oil put immense pressure on the Oil-based economies to hedge massively on the crude oil prices.
18 March 2020, the Black day for Crude oil in the 21st century
Oil prices continued the slide for the third day in a row on 18 March with almost all major economies going under lockdowns and travel bans implemented globally.
The US crude oil benchmark Western Texas Intermediate (WTI) futures prices fell to the 18 year low of US$20.37, with the possibility of trading even lower during the session. Although the decrease in the US stocks of Crude oil supported the price to some extent, the recent price war’s bugle call by Saudi Arabia and the fathomless declining demand of oil are driving down the prices further.
WTI Crude Oil Benchmark Price Chart Source: Refinitv Eikon
This is the largest fall in the future contract prices since it started trading in 1983. The Coronavirus effect can be seen on the futures prices, which fell almost 36% this week against last week’s closing prices to $20.37 a barrel on the New York Mercantile Exchange. The US has implemented a travel ban on the European nation and later included the UK to the list and has urged its residents to avoid any mass gatherings. The effect of this is visible on the market's pursuit to find a new bottom.
Crude Oil Futures Slashes, Blue Chip Energy Stocks Face the Heat: Must Read
The Brent crude prices also fell by almost 26.5% this week to $24.88 a barrel. Brent crude oil prices were at a 16-year low. Brent crude, which is also known as the North Sea oil, is the European benchmark for the sweet crude oil and with entire Europe grappling with the coronavirus outbreak, a further downfall of the same can be anticipated in the times to come.
The Russia-Saudi Arabia Spat Now Plaguing the Entire World
The au courant audience must know that on 08 March, following the failure of the OPEC+ to reach a consensus on further production cuts in the eye of lower demand and prices, Saudi Arabia decided to tear apart the 2017 agreement on cutting down the production announced an increase in oil production in future. Saudi Arabia, the largest oil producer in OPEC (Organization of the Petroleum Exporting Countries), announcing an increase in crude oil production, drove down the crude oil prices.
The oil price war is speculated to be aimed at Russia, which declined to cut the oil supply to boost the prices in the midst of the economic desolation by coronavirus.
The fall has not just been limited to the Oil prices but has also spread to the equity markets and the commodity prices. For instance, copper prices plunged to a 45-month low value on 19 March 2020 on the LME.
As per the media reports, Iraq has called for an emergency meeting of OPEC & non-OPEC players to put a stop to the escalating matter.
The tussle between Russia and Saudi Arabia is expected to relax in the upcoming weeks upon the intervention of the global community. However, for now, Saudi Arabia is producing a record-high volume of oil at around 12 million barrels a day. We foresee an intervention by one of the major producers such as the US or OPEC could ease the tensions between Saudi Arabia and Russia.
Japan, the third-largest economy in the world, has announced a 9% y-o-y decline in the demand in February 2020.
EIA & OPEC Guidance on the Demand Growth
Earlier, both the US EIA and OPEC had cut down their respective guidance for oil demand in 2020. The US EIA anticipates the global petroleum & liquid consumptions to average around 99.1 million barrels per day during the first quarter of 2020, experiencing a year on year decline of 0.9 million barrels per day. For the year 2020, EIA maintains growth in demand of 0.4 million barrels per day. The low demand in the first quarter is attributable to the weak global economic growth along with the reduced travel activity globally during the Coronavirus outbreak. The virus impact is estimated at ~2.5 million bpd. Industry experts believe the effect to be around ~8-9 million barrels per day.
As for the crude prices, EIA expects the Brent crude to average at US$43 per barrel in 2020, experiencing a decrease of almost a third in comparison to 2019. The actual prices would be dependent on the demand-supply gap and the inventories level, which often put pressure on the crude oil prices.
Also, the OPEC+ has around 2 million bpd spare capacity with Libya having an additional 1 million bpd capacity, and the oversupply situation could worsen significantly. The Global community needs to check on that with proper negotiations and unlike the current Russia-Saudi Arabia spat.
The times are grim, which is reflected in the cyclical crude oil prices, but we anticipate it to be transient. The situation requires a collective effort from the global economies to take strict measures to curb the Coronavirus outbreak, following which we might experience good times for the crude oil and the global economies.
