Oil prices crashed on March 9, 2020. The chain of events leading to March 9th and the following days are historical. We lived a very rare moment in the oil price(Brent price for this article) movements. What will happen tomorrow? Understanding tomorrow deserves a more careful examination of yesterday. How the dynamics developed, when the covid19 effect kicked in? These are important questions.
The signals for a volatile year were there in January, but not to this extend. The opening of the year was 2.6% higher at 68$. That was the highest since May 2019. But the second week didn’t end well as well as the start of the third week. There was an expectation that there may be a military confrontation between Iran and the US. As this scenario faded away, gains were lost.
IEA’s Oil Market Report from January 16th reads “Our global demand growth forecasts for 2019 and 2020 remain unchanged, at 1 mb/d and 1.2 mb/d”. So the expectations were 2020 will be a better year than 2019. Meanwhile Covid-19 was spreading.
During that time, no coronavirus effect on prices was observed. The world growth was a little bit better, and expectations were on the positive side. On January 23, the Chinese government locked down Wuhan. This news pushed oil prices lower as Brent moved below 60$ the next day.
The slide continued till February 10. Oil price has found some relief and climbed upwards from the low of 10th at 53$ as its lowest level in a year. The primary reason at that point became Covid-19. The second reason was Russian reluctance to an OPEC+ plan. On February 4, Russian Energy Minister Alexander Novak said that he is not sure about tightening output further. From 4-6th February, the Joint Technical Committee was having their meeting on cuts.
At that time, OPEC+ was cutting supply by 1.7 million bpd. There are also supply cuts due to sanctions. Venezuela, Iran, Libya’s civil war, and UEA’s output fall by 0.3 mb/d were the deficits on the supply side.
On the 8th, OPEC published a press release following the extraordinary meeting of the Joint Technical Committee (JTC) in Vienna. The press release states the adverse effects of the coronavirus epidemic mostly limited to China. So there were no worries of a global crises at that point.
JTC recommended current cuts to last till the end of 2020, which is 1.7 mb/d. In addition to that, advised on further cuts till the end of the 2nd quarter of 2020. But the Russian side has already given the signals that no more additional cuts will be supported.
If we rewind a little bit to December, Russia has achieved to exclude condensates from production data regarding OPEC+ targets. Gazprom and Novatek’s growing gas production and hence condensate production of 7-8% of oil output was excluded.
On February 13, IEA published its monthly report. The agency downgraded the global demand growth forecast to 0.82mb/d. In a typical year, this should be 1-1.5 mb/d.
By the end of February, it was already apparent that Covid-19 was something much bigger than initially thought. On the 27th and 28th February, the Brent slid to the boundary of 50$. At that point, additional OPEC+ cuts were nearly for sure.
On March 4, Goldman Sachs slashed its estimates and mumbled possibility of 45$ by April. Their research note was also considering additional OPEC+ cuts. Novak arrived in Vienna for talks. Iranian oil minister stated that the Russian side was reluctant, and OPEC has no plan B.
The next day OPEC advised 1.5 mb/d cuts on top of the already going on cuts of 1.7 mb/d. But Novak flew to Moscow to talk with Putin. That was strange since he may call Putin, but instead, he made a round trip and returned to Vienna on Friday. During his visit, OPEC ministers met and decided to cut 1.5 mb/d more if Russia and everyone join.
By Friday (March 6), there was no agreement. Novak said to the press, “From April 1 neither OPEC nor non-OPEC have restrictions,” and everyone will pump at will. Saudi Minister was asked about what will happen next, and he said: “I will keep you wondering.” Oil tumbled to 45.6$ on that Friday.
The drama has not ended. On Saturday, March 7, Saudi Aramco cut April prices to Asia by 4-6$ and US by 7$ by email before midnight in Saudi time. But the most significant cut was to Europe by 6-8$. Aramco’s Arab light has been discounted to Brent by 10.25$. Saudis vow to increase their production up to 13 mb/d.
On Monday(9th), the Saudi price attack has contributed to the market panic due to Covid-19. US President Trump tweeted, “oil price drop is good for the consumer.”
Prices dropped to $35 by Monday. The drop was so large, and some thought there was a mistake in the data. Price crash reached 30% as the Asian trading started. Prices gained close to 1.3$ on Tuesday. However, on Thursday(12th) due to covid-19, as well as Saudi and UAE’s plans to increase production, prices dropped again to $31.05.
The next Monday, due to economic concerns, prices slipped further to 28$. Now it looks as if no one can hold the price. But by Wednesday, March 18 the prices dropped below 25$, the lowest level in 17 years. It was like a perfect storm, supply glut meeting demand destruction. On the same day, Russia admitted: “recent crash meant it would run a budget deficit.”
The next day, Thursday, March 19, Trump said, “At the appropriate time, I will get involved, yes.” to a question about intervention in the oil price war between Saudi Arabia and Russia. Prices moved up a little bit. By Friday, prices tumbled again as Russia rejected Trump’s intervention.
In this perspective, the price crash of 2020 was not short of a soap opera. But if we step back and read a paragraph of a speech from October 24 2019, things may get a bit more interesting. “While at the previous forums in Verona we named three “regulators” on the global oil market, Russia, Saudi Arabia, and the USA, now we have only one market regulator -the USA, and we have to accept it.”… These were the words of Igor Sechin.