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Popular investor inclination may be that after such a dramatic fall, the oil price has to bounce back, that investor sentiment on the downside was an overreaction. That inclination might also say after a chance for reflection has been allowed, prices will recover.

But the reality is all we can reliably expect is a period of intense volatility.

A price recovery will only come if the price war between Saudi Arabia and Russia comes to an end.

Both sides have substantial financial reserves. Russia, in particular, is benefitting from a collapse in the ruble against the dollar, making its oil receipts not much different from before hostilities broke out.

Russia can weather this storm for some time to come and seems ill-disposed to reach an agreement for substantial cutbacks any time soon.

Saudi Arabia’s policy, on the other hand, seems to be set largely by the young Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud (or MBS, as his name is sometimes abbreviated by the media).

The crown prince has shown he is willing for Saudi Arabia to make considerable sacrifices if he believes he is in the right — witness the ruinous ongoing war in Yemen the kingdom has been waging for nearly five years (and realistically achieved little in the process).

Earlier this month, the U.S. appointed an energy envoy to Saudi Arabia, raising hopes that the U.S. might broker a truce between the Kingdom and Russia.

But so far, no progress has been made.

An announcement by the U.S. that it would add 77 million barrels to its strategic reserve to support prices will do little now that the coronavirus is decimating demand.

As The Economist notes, the vast salt caverns along America’s Gulf Coast that contain the strategic reserve are already about 90 percent full, so they cannot store enough excess supply even if that were a viable option to impact prices. Not only are national strategic and producer reserves rapidly filling up, but so are consumers. Oilprice.com reports refiners in Baton Rouge could begin to slow deliveries as their own storage facilities max out, further depressing prices.

Related: Oil Hits $20 For The First Time In 18 Years
The article quotes Bernstein, a research firm, which estimates demand in the first half of the year will be maybe 10 percent, or even 20 percent, below what it was in 2019.

In the past 35 years, demand has only twice been lower than in the preceding year — in 2008 and 2009.

Yet shale oil continues to flow, adding to OPEC+ excess supply.

Many shale drillers are hedged for now and the outlook for output cuts in the short term is limited. Added to this is a potential 1 million barrels a day of output that some analysts fear could come back onto the market from Libya gradually this year.

Oilprice.com reports global oil demand could plummet by 18.7 million barrels per day (bpd) in April, deepening an expected demand plunge of 10.5 million bpd for March, citing Goldman Sachs advice, overwhelming any possible cutbacks Saudi Arabia and Russia could now make.

Talk of sub-$20 per barrel oil that seemed excessively pessimistic just a week or so back is now a reality. CBC reported Friday that Western Canadian Select (WCS) was selling for $6.45 U.S. a barrel Thursday, down U.S. $2.84 from a day earlier.

Related: Refiners Are Having To Pay To Produce Gasoline

As a result, it opened the very real possibility that producers, at least in the short term, may have to pay companies to take oil — effectively creating negative oil prices.

Source: Standard Chartered Research

Such chaos will decimate investment and idle exploration, opening up the probability that prices could surge in the years ahead as the industry is unable to meet a return in demand.

For now, though, producers and consumers are going to face a volatile pricing environment, with prices driven as much by sentiment as the appalling underlying fundamentals.

By Stuart Burns via AG Metal Miner

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Comments

  • Mamdouh Salameh - 30th Mar 2020 at 1:48pm:
    It happened once before in far less atrocious circumstances than the coronavirus outbreak when in the early 1980s, Sheikh Ahmad Zaki Yamani, the veteran former oil minister of Saudi Arabia, suddenly awoke to Saudi Arabia’s need for market Share. He flooded the market with oil causing the oil price to collapse to $10/barrel. It later transpired that the Saudi need for a market share was just a cover for a CIA-Saudi conspiracy to expedite the downfall of the Soviet Union with the Reagan administration starting a costly arms race and Saudi Arabia depressing oil prices by flooding the market. Saudi Arabia ended bankrupting itself in the service of the United States.

    As long as the coronavirus outbreak is still raging, nobody could predict accurately where oil prices and global oil demand are headed. The outbreak has virtually made a continued oil price war between Saudi Arabia and Russia irrelevant to global oil demand and prices but not so for Saudi Arabia which could end bankrupting its economy and the destabilizing the country with a continuation of its price war.

    Russia will win the price war. But in truth there will be no real winners because everyone will be a loser with the global economy emerging as the biggest loser and within the global economy the two largest losers will be Saudi Arabia and the US shale oil industry.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • David Chura - 30th Mar 2020 at 6:18pm:
    You can be guaranteed the cost fuel at the pumps will never reflect this lower cost of oil, And when the price of oil comes back up, You can be assured it will double what it has been, and there will be more taxes added to it.
    They will push us all into a recession if not a depression, worse then the thirties !
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