Brent crude oil prices hit $31 a barrel, down nearly 30 per cent in trade on Monday and extended their 10 per cent weekend drop as the world’s biggest crude oil producers failed to agree on production cuts, kicking off a price war and sending oil into freefall.
Saudi Arabia that slashed prices for April delivery by $4-6 a barrel to Asia and $7 to the United States has far more fire-power than Russia in terms of readily available spare oil production capacity, analysts say, and the action is indeed the start of a price war among all producers, which in other words, is nothing but a race to the bottom.
“If OPEC ends up discarding its pro-active market-management policy adopted in 2016 to combat the worst oil glut in world’s history, it essentially loses its raison d’etre. The collapse of the OPEC/non-OPEC alliance was a major shock to the oil market, and it comes with the added challenge that we don’t have the full picture of what lies ahead,” said Vandana Hari, founder of Vanda Insights, a Singapore-based provider of global oil markets macro-analysis.
The failure of the Vienna talks added to increasing investor nervousness over the coronavirus epidemic that has dampened oil demand and the efficacy of official response measures such as last week’s emergency rate cut by the US Federal Reserve.
“If we do see an all-out price war breaking out while the coronavirus is still rampant, Brent could well start skidding towards $30 a barrel. That said, as things stand, $20/barrel looks a remote possibility and prices should stabilise before that,” Hari said.
Virus outbreak dents demand
Coronavirus outbreak, on the other hand, has already slowed down major world economies and dented oil demand. While China appears to be on the verge of containing the outbreak, cases outside the country continue to grow and the potential impact on demand will be something Opec will have to consider in the times to come.
“We recognize that until there is further clarity on the outbreak, Brent prices could face pressure. On the other hand, central bank support as seen with the recent US Federal Reserve announcement [cutting interest rates] is providing a key backstop,” said Shin Kim, head of supply and production at S&P Global Platts Analytics.
Thus far in calendar year 2020 (CY20), Brent oil prices have plunged a massive 57 per cent – from nearly $70/barrel to around $31/barrel now. Since China buys over 70 per cent of its crude from OPEC and its allies, the demand destruction caused by coronavirus has been more pronounced.
“The fall in prices has nothing but a knee-jerk reaction to the developments. While it is difficult to predict the bottom, fundamentally oil looks weak in the backdrop of slowing demand and the state of oversupply the oil market is in,” said Kishore Narne, associate director for commodity research at Motilal Oswal Financial Services.
Meanwhile, S&P Global Platts Analytics has cut its 2020 demand oil growth projection by 1.1 million barrels/day (b/d) since January to 240,000 b/d with chances of a further downward revision. Refineries in China are estimated to have cut throughput by 2.9 million b/d in February, according to Platts Analytics. China’s oil demand is expected to grow by only 170,000 b/d in 2020, 20 per cent of its original estimate. Goldman Sachs, too, expects oil demand to contract by 150,000 b/d in 2020, reversing an original call for 1.1 million b/d of growth before the virus.