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What's Really Happening In Oil Markets?

Oil & Gas	1153 VIEWS
Oil & Gas
1153 VIEWS

Thursday, March 19, 2020 / 08:52 AM / by Tom Kool of Oilprice.com / Header Image Credit: Nikkei

Whether you are relatively new to the oil market or a seasoned veteran, I am willing to bet you haven't seen many days like today.

Wednesday the 18th of March 2020 is going to go down as one of the worst days in oil market history. WTI collapsed by over 23 percent, the third-largest daily price decline since records began, and experts expect it to go lower still.

So what exactly is happening and how low can oil prices go?

To answer the first half of that question there are two separate but interlinked issues that need to address. The first is the global coronavirus outbreak and the second is the disintegration of the OPEC+ alliance.

As of March 11th, coronavirus was officially designated as a pandemic by the WHO. Since then, Europe and North America have seen confirmed cases and deaths from the coronavirus spike and governments have enforced social distancing, quarantine and travel bans. All of this has caused stock markets to crash and driven local economies to a standstill. With oil demand already shrinking due to the coronavirus outbreak in China at the start of the year, the halting of Western economies leaves very little hope for demand bouncing back in 2020.

At the same time, we have seen markets flooded with oil on the supply side due to the breakdown of the OPEC+ alliance. This came after Russia refused to join OPEC in deepening production cuts when it became apparent that the original OPEC+ cuts had failed to keep oil prices elevated. With Russia out of the deal, Saudi Arabia - as it did in 2014 - decided to open the taps and produce as much oil as possible. It is now ready to produce 12.3 million barrels per day and export 10 million barrels per day (its highest ever export volume).

When combined, the demand destruction caused by the coronavirus and the supply boom caused by the breakup of OPEC+ has created the perfect storm for oil markets. Economic incentives have all but gone out the window as governments prioritize health and Saudi Arabia and Russia prioritize market share. It is this situation that has led some market observers to call for negative oil prices before long - but that's another story.