Prices of Brent crude oil dropped sharply by 9% to US$30.56 per barrel, the lowest since February 2016. Meanwhile, US West Texas Intermediate (WTI) crude prices fell from US$29 per barrel to US$28.70 per barrel in the New York market. Despite a rebound thanks to investors’ purchasing oil at agreed prices, the recovery is considered to be only temporary, as travel restrictions and strong measures put in place by countries to curb the COVID-19 epidemic are predicted to continue to weaken oil demand in the context of excess supply. In China, which is considered the “factory of the world”, the demand for oil has declined as the country has been struck by COVID-19. The risk of a global economic downturn is putting significant pressure on oil prices, which were already very precarious.
Meanwhile, one of the other factors affecting oil prices is the “newly waged” oil price war between Saudi Arabia and Russia, the two leading oil producers of the world. The battle has put an end to the smooth handshake between the two main factors in the alliance between OPEC and non-OPEC oil exporting countries (OPEC+) to cut production in order to maintain oil prices at an acceptable level over the past year. The oil price war broke out after Saudi Arabia, a pillar of OPEC, recently proposed production cuts to prevent negative effects of COVID-19. However, Russia, the world’s second largest oil exporter, opposed the proposal and did not want any further cuts. In response, Saudi Arabia and some OPEC allies suddenly made a “reversal” move, deciding to increase exploitation outputs. Both Saudi Arabia and the United Arab Emirates (UAE) vowed to increase production to record levels, while the world’s leading producers also pledged to increase their production capabilities aiming to gain market shares.
The aforementioned situation has resulted in a risk of excess oil supply. As forecast by Goldman Sachs, by April 2020, the oil market will witness a record high excess supply, about six million barrels a day, in the context of a higher-than-expected surge in oil production and a sharp plummet in demand. Oil inventories in the next six months will gradually increase to the levels recorded in the 18 months from 2014 to 2016. In the context that all production limits have been lifted with OPEC and non-OPEC members failing to reach an agreement on production cuts, while oil demand is estimated to decrease by 4.5 million barrels a day due to the impact of COVID-19, oil prices can hardly avoid a decline in momentum.
The “black gold” market is being mechanically supported by speculators via increasing purchases for accumulation, but oil stocks are said to be quickly filled. When the purchase demand is satisfied, oil prices are expected to continue to plunge. Global markets will then have to rely on the possibility of the tensions between Saudi Arabia and Russia cooling down before escalating to the point of no return. However, the new oil price war has been waged and it is difficult to predict when the two sides will “close the curtains”. According to analysts, with nearly the lowest production costs in the world, together with a flexible tax system and floating domestic currency, Russian businesses can still maintain exploitation even in a scenario of very low oil prices. Meanwhile, Saudi Arabia is trying to gain a leading position in the oil industry with a strategy to lower prices and sharply increase production.
The precarious development of oil prices has made the stock markets in oil-rich Gulf countries sink in red. The major stock markets in the world also experienced a bad trading day with a deep drop in oil prices. The cumulative impacts of the COVID-19 epidemic on the economies and the oil price war have been causing the “black gold” market to wobble in the “multiple storms”.
