Will the crude oil rout continue?

With coronavirus already savaging demand for travel and transportation, "the world is now drowning in a glut of crude oil that appears likely to persist for months", said Chris Lafakis, Energy Economist at Moody's Analytics.

After talks broke down, the Saudis and Russians kicked off an oil price war, both announcing plans to ramp up production and flood the market with crude. The strife was even described as an oil price war between Moscow and Riyadh, even though neither side actually described it as such.

"The decrease was primarily due to lower crude oil prices and production volumes, coupled with declining refining and chemical margins", it said. The average break-even price for USA oil producers is in the US$48 to US$54 range, and United States producers are now much more heavily indebted than they were six years ago.

Replenishing the Strategic Petroleum Reserve - as proposed by some oil lobbyists earlier this week in light of the collapse in prices - would enable the government to take as much as 77 million barrels off the world market. Cutting investment could help absorb some of the impact of the drop in oil prices, he said.

Oil futures failed to sustain gains due to expectations that energy demand will drop significantly for at least a short duration due to the coronavirus spread and due to the decision of Russian Federation and Saudi Arabia to increase crude production.

Hamm says he has asked the Domestic Energy Producers Alliance in the USA to investigate this "illegal" dumping of oil from these producers. "Through a variety of circumstances - some planned and some not - the world was offered unprecedented insight into Saudi Aramco's agility and resilience". Goldman Sachs predicts oil prices could hit $20 a barrel.

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The company produced 13.2 million barrels of oil equivalent per day (boed) previous year versus 13.6 boed produced in 2018. Again, the oil market is preparing for the worst case scenario.

Energy Minister Alexander Novak said on Friday Russia saw no grounds so far for returning to discussions with its OPEC+ partners and can increase its oil production by a modest 200,000 barrels per day in April.

The state of Saudi Arabia controls a 98% stake in Aramco. On the other hand, the price-war-for-market-share game being played out by major producers will result in huge oversupply. "Saudi Arabia has de facto launched a price war against Russian Federation, promising to sell its oil at a discount in order to maximise its oil revenues", say analysts at UniCredit bank.

A Reuters survey showed analysts slashed their forecasts of Brent crude prices to $42 a barrel on average in 2020, compared to the $60.63 consensus in a February poll.

Aramco shares rallied immediately after the listing on December 11, rising by 19 per cent to 38 riyals ($10.1) and temporarily lifting the company's valuation above the $2 trillion mark, which was sought by the crown prince. This battle will impose intense hardship in many oil-producing countries, with political implications that are hard to predict.

  • Darren Santiago