Oil prices start this week with their biggest week of losses since the 2008 global financial crisis under their belt.
Thanks to the rapidly growing coronavirus outbreak efforts by top exporter Saudi Arabia and its allies to flood the market millions of barrels of extra crude, prices mostly ignored the positive lead from equity markets on Friday in the wake of President Donald Trump’s declaration of a state of emergency across the US.
That will see up to $US50 billion in spending and other measures, free COVID-19 testing (but not treatment), sick pay for some workers, waiving of interest on student loans, and importantly for oil markets, purchases of crude for the US strategic reserve.
That helped prices rise gently on Friday, but not enough to offset big weekly losses. Global marker crude Brent rose 63 cents to settle at $US33.85 a barrel, while West Texas Intermediate crude rose 23 cents to settle at $US31.73 a barrel, after earlier rising to $US33.87 a gallon.
It ended after-hours dealings at $US32.97
But that left Brent crude nursing losses of around 25% for the week, the biggest weekly fall since the 2008 global financial crisis. US West Texas Intermediate crude lost around 23% for their biggest percentage decline since 2008.
While the impact of the virus on global demand over the rest of 2020 and into 2021 is a huge factor for prices, overshadowing all that is the volume and price war between the Saudis (and some allies such as the UAE) and Russia.
Now other producers, traders, the LNG sector, gas in the US, and even thermal coal miners and exporters, face a long period of dislocation around the world from the battle for supremacy in oil.
US shale frackers will be hurt – which is the longer-term target for both the Saudis and Russia – though Trump’s announcement to buy oil for the strategic reserve will soften some of the pain and the Fed’s injection of $US1.5 trillion into short term money markets will ease fears of a credit crunch for the sector.
“It’s a problem of an oil price war in the middle of a constricting market when the walls are closing in,” US energy historian Daniel Yergin said last week in a Reuters story.
The coronavirus sparked panic selling across markets for the bulk of the week but it was volume and price war between the Saudis and Russia that triggered last Monday’s 25% plunge in prices and the uncertainty over the rest of the week.
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.
The Saudis reportedly said they would be lifting production to a daily top of 13 million barrels, up around 3 million, while the UAE said it would lift output by a million barrels a day to 4 million.
Russia, the world’s second-largest producer, has shown no sign of changing its mind and agreeing to further output curbs with OPEC.
Reuters reported that Russian oil producers met Energy Minister Alexander Novak on Thursday but did not discuss a return to the deal. The head of Gazprom Neft said it planned to hike production in April, following the talks
While these boost to production start emerging, analysts reckon COVID-19 could cut consumption by up to 3 million barrels a day, while Goldman Sachs said on Friday that the daily surplus could rise to around 6 million barrels (in a daily supply of around 100 million barrels).
The market has likely “reacted correctly” to expectations that COVID-19 would drop oil demand by two to three million barrels a day for a few weeks, at least, and to Russia and Saudi Arabia ramping up production by two million barrels a day “or more,” Michael Lynch, president of Strategic Energy & Economic Research told Marketwatch.com.
“That will create an enormous inventory build, 100-150 million barrels a month,” he told MarketWatch. But the very sharp price fall “seems likely to encourage the Russians to offer some kind of deal to the Saudis that would see a brief, but sharp production drop.”
