Oil Price War Begins

The oil price wars have begun. Prices are down by the largest amount since the 1991 Gulf War, and agencies are racing to reconsider their price forecasts for the year. The stock market halted trading immediately after reopening due to massive losses. What’s going on?

On Friday, Russia fired the first shot of the war. Presented with an ultimatum to accept steeper production cuts or no deal at all, Russia chose the latter.  Russian Energy Minister Alexander Novak crystalized the significance after the OPEC meeting closed by saying, “From April 1, neither OPEC nor non-OPEC have restrictions.”

Saudi Arabia responded by immediately slashing its oil prices well below Russia’s and announcing plans to increase output by as much as 2 million barrels per day.

The head of the International Energy Agency (IEA), Fatih Birol, took to twitter, commenting that between declining demand due to COVID-19 and now a massive supply war, today’s market has seen “no equal in oil market history.” The IEA released their March oil report which declared that global oil demand in 2020 would be a negative 90 kbpd from last year – the first demand drop since the 2009 recession. This morning, Goldman Sachs likened recent events to having a 2009 level recession mixed with 2015 Saudi production surge, setting a price target for Q2 and Q3 of $30, with potential dips to $20 at times.

In the midst of the market chaos this morning, it’s important to remember that Russia and Saudi Arabia can turn this around in minutes by agreeing to extend current output levels for the remainder of the year. While both seem frustrated with the rise of American shale oil despite their best efforts, the math is not in their favor. Their options are to cut production by ~10% from full capacity, or see prices fall by over 30%. The price war is in neither party’s interests, and while they may win market share, they’re losing revenue.

 

Daily Market Trends

When low demand meets high supply, the result will inevitably be significantly lower oil prices. Crude oil is experiencing one of the most severe routs in history, and market uncertainty is astronomical. Crude is currently trading at $32.55, down $8.73 (-21.2%) from Friday’s closing price.

Fuel prices have seen slightly less downward movement, though the drop is still historic. Diesel prices are trading at $1.1769, down 20.8 cents (15.0%). Gasoline prices are trading at $1.1614, down 22.8 cents (-16.4%).

Market Condition Report - Disclaimer
The information contained herein is derived from sources believed to be reliable; however, this information is not guaranteed as to its accuracy or completeness. Furthermore, no responsibility is assumed for use of this material and no express or implied warranties or guarantees are made. This material and any view or comment expressed herein are provided for informational purposes only and should not be construed in any way as an inducement or recommendation to buy or sell products, commodity futures or options contracts.

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