A Crude Awakening – The Oil Price Slump!

The prospect of cheaper petrol at a time when the world is largely under lockdown is no silver lining to the Covid-19 pandemic. Energy analysts believe there is little upside to this unprecedented plunge in oil prices.

Michael Moebs, CEO of Moebs Services believes plummeting oil price could drive interest rates down even further. That is a prospect with negative implications for banks and may destabilise financial markets already shaken by Covid-19. The hangover from the oil crash could linger well into 2021.

Jobs in energy will be the first domino to fall, especially for smaller producers. The spill over will be on other businesses that service them.

Employment in the oil industry will be under pressure until prices go above USD40 a barrel. And that is not seen in the foreseeable future. On a net basis it is atrocious for the U.S. economy.

But why are oil prices crashing?

Saudi Arabia launched a price war because of Russian intransigence on production cuts. Russia sees any production cuts will be filled by American shale oil producers. Therefore, cuts are deemed futile unless they too are involved. America is the number one producer in the world with 13 million barrels a day. (Malaysia only produces 650,000-700,000 barrels a day)

What is the Blink Price?

Price war is no recipe for stability. All major oil producers will lose money even if they regain market share.

Russia’s budget is based on average price of USD40 a barrel. The Gulf countries produce oil at USD2-6 a barrel. But because of budgetary requirements they need USD70 or higher a barrel (to balance their budgets).

What’s the impact on consumers?

Importing nations like China, India and Germany get much relief from falling energy bills.

Consumers benefit from lower petrol prices at the pump. But reduction in prices is outweighed by coronavirus and the economic slowdown.

So, What’s the Prognosis?

 

Energy Information Administration (“EIA”) global petroleum and liquid fuel consumption averaged at 94.4 million barrels per day, in the 1^st quarter of 2020. That’s a decline of 5.6 million barrels from the same period in 2019.

EIA expects petroleum demand will decrease by 5.2 million barrels per day from an average of 100. 7 million barrels per day in 2019. For 2021, demand is anticipated to increase by 6.4 million barrels per day. Demand growth in 2020 is marked by disruptions in economic activity and reduced travel globally. Hopefully a U-shaped recovery by 2021 will restore the demand-supply balance.

References

1.     Martha C. White, CNBC News, April 22, 2020.

2.     John Defterios, CNN Business, March 9, 2020 (Why Oil Prices are Crashing and What it Means).

3.     U.S. Energy Information Administration, Short-Term Energy Outlook April 7,2020.