Driven by cratering economic activity due to the coronavirus pandemic, oil markets crashed 31% in a matter of seconds last week, after cooperation across a loosely-knit group of oil-producing countries collapsed and triggered an all-out price-war between fossil giants Saudi Arabia and Russia.
“Hammered by withering demand due to the coronavirus, the oil market is sinking deeper into chaos,” Bloomberg reported last Monday. “Saudi Arabia slashed its official prices by the most in at least 20 years over the weekend and signaled to buyers it would ramp up output—an unambiguous declaration of intent to flood the market with crude. Russia said its companies were free to pump as much as they could.”
As a result, the price of Brent crude oil, the benchmark for European suppliers, “suffered the second-largest decline on record in the opening seconds of trading in Asia, behind only the plunge during the Gulf War in 1991,” Bloomberg added. Brent fell as low as US$31.02 a barrel, with Goldman Sachs Group predicting it could approach $20.
“The cataclysmic collapse will resonate through the energy industry, from giants like ExxonMobil Corporation to smaller shale drillers in West Texas,” the U.S. news agency said. “It will hit the budgets of oil-dependent nations from Iraq to Nigeria and could also reshape global politics, eroding the influence of countries like Saudi Arabia. The fight against climate change may suffer a setback as fossil fuels become more competitive versus renewable energy.” [Or perhaps not—Ed.]
The price moves also mark the dramatic end of the OPEC+ alliance, which had held oil prices more or less steady since 2016. Between the pandemic and the price war, “the oil market is now faced with two highly uncertain bearish shocks, with the clear outcome of a sharp price sell-off,” said Jeffrey Currie, head of commodities research at Goldman Sachs.
The collapse also drove U.S. natural gas prices to a 21-year low and hammered Saudi Aramco, whose value has fallen by about $500 billion since its much-anticipated public share offering in December, the Globe and Mail reported.
An oil price war can speed up greenhouse gas emissions if lower purchase prices drive up demand for petroleum products, but can harm fossil producers whose businesses are already in rough shape. This time, early analysis suggests the climate impact may be more muted, the prospects for many fossils more severe.
“There are winners from rock-bottom oil prices—among them China, the world’s largest oil importer, whose recovery from the virus will be key for the global economy,” Bloomberg writes. “But this time is different. The U.S.—once a winner from low oil—is now an exporter rather than a buyer. And the hit to economic demand from the virus dulls the impact of any stimulus that cheap oil might provide.”
“Lower oil prices will still not get people back in trains, planes, and automobiles, and stimulating the economic sectors most heavily hit,” said Stephen Innes, chief Asia market strategist with Axicorp Ltd. “But now we have a financial disaster brewing in the form of the shale industry meltdown.”
The anticipated carnage in the U.S. shale fields appears to be exactly what Russia had in mind when it engineered the breakup of OPEC+.
“The crisis was precipitated when Russia refused to yield to a Saudi-led gamble to force Moscow to join OPEC in production cuts,” which would have stabilized or driven up global oil prices while the pandemic was slowing economic activity and demand, Bloomberg explains. “OPEC presented a take-it-or-leave-it plan to slash production and throw a floor under prices. But Russia had another idea: its strategy was to squeeze American shale producers, which have flooded the market in recent years as OPEC+ nations held back their own production.”
Now, the news agency says, “many of those U.S. operators will be losing money on every barrel of oil they produce and, unless there’s a dramatic recovery in the price, face bankruptcy.” Even before the “catastrophic” OPEC+ meeting March 6, “banks were expected to restrict lending to shale drillers and a chunk of high-yield energy debt is already trading at distressed levels.”
By the end of last week, there was no relief in sight. “Major oil producers were pumping more crude into the market as demand collapses,” Reuters reported Thursday. “Saudi Arabia has chartered more than 30 crude supertankers to export oil in coming weeks, specifically targeting big refiners of Russian oil in Europe and Asia, in an escalation of its fight with Moscow for market share.”
Separate reports had Saudi Arabia offering prices as low as $25 per barrel to European buyers, Abu Dhabi posting similar discounts, the United Arab Emirates boosting oil production, and Russia selling its main oil blend at just above $30. “European oil refiners including Total SA, BP PLC, Eni SpA, and SOCAR have all had allocations for additional Saudi crude oil supplies in April confirmed,” Reuters said.
“There’s hope that all the stimulus will stabilize the economy and offset some of the concerns about weaker demand and keep parts of the economy strong enough to support oil prices,” said Chicago-based Price Futures Group analyst Phil Flynn.
But by the middle of last week, analysts were advising fossils and investors to dig in for a long period of low prices. “We believe oil prices will not bottom until the fourth quarter of 2020 or first quarter of 2021, particularly in view of the weaker demand outlook caused by the COVID-19 outbreak,” Bank of Nova Scotia energy analyst Paul Cheng told a conference call on Wednesday.
“The staring contest between Saudi Arabia and Russia is likely to lead to a painful and protracted path for oil prices,” agreed a research team led by the Royal Bank of Canada’s head of global commodity strategy, Helima Croft.
“Saudi’s shock and awe strategy suggests to us that to bring Russia back to the negotiating table, it is serious in causing severe price and revenue pain for all oil producers,” added analysts at Switzerland’s UBS Group. “Higher oil inventories will likely weigh on prices over the coming months.”