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Coronanomics (5) - Global Oil Market - Spinning Around A Vortex

Commodities	2630 VIEWS
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Thursday, June 11, 2020 / 05:55 AM / by Proshare Content/ Header Image Credit: EcoGraphics

The international oil market in 2020 was disrupted by the adverse impact of COVID-19. The spread of the virus in the USA, China, Asia Pacific, Europe and the rest of the world resulted in a fall in global oil demand. An agreement to cut oil supply by OPEC and its OPEC plus counterparts has failed to hold prices up.

The impact of COVID-19 on the oil market has been punishing for oil producer as the price of WTI and Brent have fluctuated between US$27 and US$37 per barrel in May 2020.

Chart 15: Cost of Producing A Barrel of Oil ($/b)

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Source: Rystad Energy Ucube, United Capital Research, Proshare Research

The protracted oil price face-off lasted for shorter than previously expected as a result of America's swift intervention which had more to do with protecting US shale producers than guaranteeing international price stability. Saudi-Arabia and Russia both have a relatively low cost of producing oil with sizable foreign reserves of $490.5bn and $570.0bn respectively. It costs Arabians US$9.9 to produce a barrel of oil while it costs Russia US$17.2 (see Chart 15).

Largest Consumers of Oil in 2019

The United States, Europe and China recorded the largest consumption of oil in 2019. According to OPEC numbers, the United State's, Europe's and China's share of consumption was 20.9%, 14.4% and 13.1% respectively (see Chart 16).

Chart 16: Largest Consumers of Oil in 2019 (%)

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Source: OPEC, Proshare Research

Largest Suppliers of Oil in 2019

The United States, Russia and Saudi Arabia recorded the largest global supply of oil in 2019. According to OPEC figures, the United State's, Russia's and Saudi Arabia's share of global supply was 20%, 12.4% and 10.6% respectively (see Chart 17).

Chart 17: Largest Suppliers of Oil in 2019 (%)

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Source: OPEC, Proshare Research

Brent Crude Price Jan 2020-May 2020 $/b

The Brent crude price at the beginning of the year was $68.6 per barrel. The break out of the coronavirus which led to a fall in the demand for oil caused a sharp fall in prices. Despite the cut in oil supply, there has been a downward slide in the international price of Brent crude (see Chart 18).

Chart 18: Brent Crude Price Jan 2020 - May 2020 $/b

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Source: Bloomberg, Proshare Research

The Prisoner's Dilemma in Oil Markets; Surviving 2020

The economist's prisoner dilemma framework explains the various possible outcomes between the top two players in the global oil market outside the United States. The best possible potential outcome during the pandemic for oil exporters and oil-dependent nations like Nigeria, Angola and Libya ould be for both top oil producers (Saudi Arabia and Russia) to agree to a sufficiently large oil supply cutback (see Illustration 3).

Illustration 3: Prisoner Dilemma Game

Fiscal Break-Even Oil Price

The majority of Middle-East and North African countries dependent on oil revenues will be adversely affected by the fall in crude price. According to the IMF's projections for 2020, the top five countries (5) under MENAP with the highest fiscal break-even oil price are Iran, Bahrain, Algeria, Oman and Libya require fiscal break-even oil price of US$124 per barrel, US$93 per barrel, US$92.3 per barrel, US$85.9 per barrel and US$79 per barrel respectively (see Table 7).

Table 7: Fiscal Break-Even Oil Price

External Break-Even Oil Price

According to IMF projections for 2020, the top five countries under MENAP with the highest external breakeven oil prices are Bahrain, Algeria, Oman, Libya, Iraq with an external breakeven oil price of $77.8, $75, $69.6, $67.7 and $59.4 per barrel respectively (see Table 8).

Table 8: External Break-even Oil Price

Gold

Gold, usually seen as a haven, by investors, has proven to be less reliable as a store of value as gold prices have fluctuated unsteadily with the global sweep of the virus. Since the outbreak of COVID-19, the price of gold has fluctuated unpredictably, dipping in some weeks while turning a face-up in others. Most recent data reveals that the price of gold fell to $1710.58 t/ oz on May 26^th from $1745.05 t/0z. This suggests that many investors may be taking long positions in gold as a countercyclical investment safe house (see Chart 19).

Chart 19: Price of Gold Jan 2020 - May 26^th, 2020, $/t oz

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Source: Bloomberg, Proshare Research

Palladium

The price of palladium recorded dips and gains at different weeks. With the gradual recovery of factories in the Chinese economy. It is expected that the price of palladium will rise in months to come (see Chart 20).

Chart 20: Price of Palladium Jan 2020 - May 26^th, 2020 $/t oz

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