Amid the chaos in the financial markets due to the Coronavirus epidemic, we have something else to worry about- an oil war, and an oil price crash- the biggest one since 1991. Today, we delve into how the oil war started and where it’s going.
Saudi Arabia and Russia’s role in The Oil War
The purpose of OPEC has been to stabilize oil markets, and Russia and Saudi Arabia, being the top
producers after the USA, have had a major role in securing a stable and efficient petroleum supply.
Decline in oil demand, caused by the Coronavirus outbreak led to heated debates about who would
reduce their output. Russia didn’t agree to reduce their productions, which, according to speculations,
was a strategic move to target the US fracking industry. So, who agreed to cuts in production? Definitely
not Russia or Saudi Arabia, who announced this week that it has plans to boost oil production to a
staggering 13 million barrels a day for the month of April, sending shockwaves throughout the industry.
What will oil prices be in 2020?
On Monday, oil prices crashed by 20%. Based on reports by Energy Intelligence, Saudi Arabia is
considering budgeting regimes that may lead to crashes between $12-$20 per barrel, with the possibility
of prices even below $10, while the current global price for crude oil stands at a 26% collapse at $31.13
per barrel. Markets have plunged ever since, with oil-exporting countries struggling to keep up.
The world’s reaction to oil price changes
- Russia is prepared to increase their production in response, according to Wall Street Journal.
- The already struggling North-American shale oil industry will be forced to cut their costs and
production by huge margins. A research firm, Rystad Energy predicts that the total industry
spending on oil could be down by $100 billion and may go down to $150 billion by 2021 if oil
prices remain to be around $30 per barrel.
- Oil extraction methods in countries like Canada and USA are more expensive and less profitable,
if at all, if prices remain to be so low.
- UAE announced that it will increase its oil output to 4 million barrels a day for the month of April
- Marathon Oil, a major US oil company already cut its capital spending by 20%.
- Cenovus Energy, a major oil producer in Canada cut its annual spending by 32%, also suspending
rail-shipping in the wake of this price war.
- Countries like UK, that are net importers of oil would most likely benefit, a low price for oil
giving a boost to the economy, despite the tensions related to Brexit and Coronavirus.
How will the oil war affect stock market?
A report by researchers at the Federal Reserve Bank of Cleveland showed some surprising findings: correlation isn’t causation, and in reality, oil prices don’t have a direct impact on the stock market. So, even if it’s a contributing factor, we can’t say it can really cause disruption in the stock market.
Is the 2020 oil price crash anything like the 2014 oil price crash?
Although there’s a fall in demand, this time, international conflicts have contributed to a steep fall in
prices probably for a long time to come. Can we recover? Of course, we can- but it takes time and
execution of intelligent market strategies. The best outcome would be an increased demand after we
recover from the worldwide Coronavirus brunt in our economies, and increased imports by countries
like China would stabilize the prices.