The demise of the OPEC meeting last weekend saw the oil market go into a tailspin this week, dragging the financial markets with it and generally causing havoc for investors as the world deals with a global health pandemic.
What a difference a week makes in the oil business.
All OPEC ministers wanted to see a positive resolution to the over-supply of oil on the market last week, but Russia had other plans.
Their refusal to deliver any additional cuts to the market sent oil prices down close to 30 percent this week.
This will be the worst price performance since the days of the 2008 financial crisis.
The Russian energy minister, Alexander Novak met with local producers on Thursday to discuss the situation.
Door ajar but Russia output rising
He knows the doors are not closed with OPEC for further consultation, but so far, Russia seems intent on increasing production, given movements from Saudi Arabia and the UAE.
With no guarantee in sight that Russia may resume talks with OPEC +, the president of Prestige Economics, Jason Schenker says, that additional “downside risks to oil prices were introduced by a Saudi announcement to cut oil prices triggering a global war for market share.” He adds that this is bound to bring prices lower.
Looking back on the last year, Schenker brings the situation into context.
“Over the last year and half, oil price dynamics have not been great, and crude oil prices have struggled to find footing, being weighed down by the 2018-2019 US - China trade war, then by the 2019 global manufacturing recession, and now on Coronavirus risks.”
Russia does not want to stand by and see the US shale industry claim market share.
The head of RBC Capital Markets, Helima Croft said in a note to clients that the country’s strategy is not just about American oil production, “but the coercive sanctions policy that American energy abundance had enabled.”
Only weeks ago the US imposed sanctions of a subsidiary of Rosneft in response for its support of the President of Venezuela.
Croft believes that the CEO of Rosneft, Igor Sechin is determined to undercut American energy dominance, adding that “it appeals not only to his bottom line but to his ideological affinities.”
America responds as expected
The response from the US was as expected, claiming that “state actors” wanted to “manipulate and shock” oil markets.
The founder and chairman of Continental Resources, Harold Hamm claimed that Saudi Arabia and Russia are taking advantage of the coronavirus situation and are flooding the market in a “direct attack” on American producers.
Hamm says he has asked the Domestic Energy Producers Alliance in the US to investigate this “illegal” dumping of oil from these producers.
Hamm said that American producers will not be sitting on the sidelines while other producers deliver more oil to the market. Hamm reminded the market that when OPEC added more oil to the market in 2014, it backfired.
He noted that it will damage the entire oil industry, but Hamm said the US government could place duty on all imports to help ease the situation for American producers.
Coronavirus impacts continue
The fallout of the coronavirus continues around the world with major travel bans and event cancellations.
The US said all flights from Europe would be suspended for a month in the hope of finding a solution. This will weigh heavy on jet fuel demand and consequently on oil demand.
As the OPEC agreement on production cuts finishes this month, all countries are free to decide their own production limits.
Saudi Arabia and the United Arab Emirates have both decided it’s time to increase their capacity.
There’s a difference between production and exports and oil capacity, but many analysts are questioning why they would make this move right now.
Saudi Arabia has already announced it will make more oil available for customers with an eye on Europe.
Investment bank Goldman Sachs says the surge in low-cost production “is significantly larger than expected with the collapse in demand due to the coronavirus.”
Goldman added that this will introduce a “new oil order with low cost producers increasing supply from their spare capacity to force higher cost producers to reduce output.”
However the current situation plays out, both OPEC and the International Agency see oil demand growth falling this year, to its lowest levels since the financial crisis in 2008.
In its monthly report, the IEA sees the additional impact of the corona virus hurting the market with demand expected to fall by 435,000 barrels a day.
Outlook is not hopeful
The outlook for the rest of the year is not hopeful meaning that year-on-year demand growth will be close to negative.
OPEC sees demand falling in the second quarter of the year with total overall growth for the year to be jut 60,000 barrels a day.
Both agencies see a return of oil demand growth in the second half of the year but neither of these reports for March took into account additional barrels coming onto the market.
The April reports will be eagerly awaited.
The global pandemic will likely get worse before it gets better and the oil market is already suffering.
The global economy is at a standstill and the uncertainty adds to the demise.
The key oil producers will need to be extremely resilient in the next few months, with no talks scheduled and no OPEC meeting in place until June.