On Monday, Saudi Arabia
reduced oil prices and offered to increase production, triggering a price war among oil-producing countries. The kingdom wanted Russia, too, to cut production to keep prices stable after the demand disruption caused by the coronavirus (COVID-19) outbreak.
The Organization of the Petroleum Exporting Countries (Opec) on March 5 asked Russia
to join a 1.5 million barrels a day production cut to offset the economic impact of COVID-19, but the Russian government did not agree.
Goldman Sachs has cut its price forecast for Brent for the second and third quarters of 2020 (Q2 and Q3) to $30 a barrel, with possible a dip to $20 a barrel.
Saudi Arabia, which slashed prices for April delivery by $4-6 a barrel to Asia and $7 to the United States, has far more firepower than Russia
in terms of readily available spare oil production capacity, analysts said.
“If Opec ends up discarding its proactive market management, the policy adopted in 2016 to combat the worst oil glut in the world’s history, it essentially loses its raison d’être. The collapse of the Opec/non-Opec alliance was a major shock to the oil markets, and it comes with the added challenge that we don’t have the full picture of what lies ahead,” said analyst Vandana Hari, founder of Singapore-based Vanda Insights.
The failure of a joint front added to increasing investor nervousness over COVID-19, which has dampened oil demand, and the undercut the efficacy of official response measures such as last week’s emergency rate cut by the US Federal Reserve.
In a sharp downgrade from the International Energy
Agency’s (IEA’s) February forecast, the Paris-based organisation said it sees global oil demand at 99.9 million barrels a day in 2020, down around 90,000 barrels a day from 2019.
It had earlier said global oil demand would grow by 825,000 barrels a day in 2020.
“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 a barrel looks a remote possibility and prices should stabilise before that,” Hari said.
While China appears to be on the verge of containing the outbreak, cases outside of the country continue to grow and the potential impact on demand will be something Opec will have to consider. Analysts say oil looks weak in the backdrop of slowing demand and current oversupply.
China’s oil demand, according to S&P Global Platts Analytics, is expected to grow by only 170,000 barrels a day in 2020, 20 per cent its original estimate.
Fatih Birol, executive director, IEA, said, “The COVID-19 crisis is affecting a wide range of energy markets
— including coal, gas and renewables — but its impact on oil markets
is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels.”
Since China, the largest energy
consumer in the world, accounted for over 80 per cent of global oil demand growth last year, developments in China have a major impact on global energy and oil markets, said Birol.