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.
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