The Saudis announced extreme measures in response to Russia’s unwillingness to participate in deeper supply cuts
has indeed taken the brunt of the coronavirus (COVID-19) health scare and was one of the first markets
to be impacted by the sell-off in risk-assets. The full demand impact of the virus is still unclear, but oil consumption is certainly under severe pressure as countries continue to escalate measures to stem the spread of the virus. In our view, jet fuel demand will continue to suffer well into the summer months due to the widespread travel bans that have been put in place. Fuel oil demand will also suffer as the cruise-line industry slows dramatically. Even after the travel bans are lifted, we suspect it will be some time before a full return to normal business for the airline and cruise industry. The same can be said about gasoline and diesel consumption, given the large scale quarantines currently in place in the US, Italy, Iran, South Korea, and with more European cities likely to follow suit in the weeks ahead.
On top of the virus-related demand concerns, oil markets
are also contending with an imminent surge in supplies from Saudi Arabia and Russia as the two nations face off in a very public way. In fact, the Saudis announced extreme measures in recent days in response to Russia’s unwillingness to participate in deeper supply cuts by drastically slashing “Official Selling Prices” (OSPs) to Asian refiners for April, thereby kicking off a three-way market share war between the US, Russia, and Saudi Arabia.
For clarity, the Saudis and other Middle East producers choose to sell their barrels on a formula basis and as a discount or premium to global benchmarks rather than in the spot market. The Saudis slashed this discount to Asian refiners by $6/barrel from March levels, the biggest month-on-month change in history. The move was an abrupt about-face as the Saudis were ironically the ones leading the charge to implement deeper cuts of up to 1.5mb/d in the lead up to the meeting. In our view, the bold move is likely to lead to mutually assured destruction as all those involved will be feeling severe pain at current price levels
Looking forward, we expect the oil market to stay under pressure until specific fiscal measures are put in place to address the economic impact of the coronavirus pandemic or until the OPEC+ members return to the negotiating table to correct the current oversupplied conditions. While fresh demand concerns continue to arise, we are encouraged by the pickup in economic activity in China and the rapid slowdown in the spread of the virus there.
We will continue to closely monitor the very public OPEC+ skirmish that has oil producers opening the proverbial faucets in an effort to flood the market and we hope that cooler heads will prevail in the weeks ahead as the current conditions benefit no one. We will look for crude oil
to fill the massive gap on the chart that was left after the Saudis initiated the market share war should we see progress on the supply or demand front in the coming days and weeks.