Energy markets headed into uncharted territory as crude prices slump

March 10, 2020
Leading financial analysts warn that further falls are in the offing

DUBAI: Global energy markets are heading into uncharted territory, experts warned, as the instant effect of the apparent end of cooperation between Saudi Arabia and Russia on limiting crude output began to be felt amid ongoing coronavirus concerns.

Prices for Brent and West Texas Intermediate crude — the two leading benchmarks on global oil markets — fell by the biggest daily proportion in nearly 30 years, as leading financial analysts warned that further falls were in the offing.

By the close of trading in the Middle East, Brent stood at $35.61 per barrel, down nearly 22 percent, with WTI at $32.45, down 23 per cent, having been almost 30 percent down earlier in the trading cycle.

Adding to the downward pressure on crude prices, the International Energy Agency (IEA) slashed its forecasts for oil demand this year as the coronavirus outbreak spread beyond its Chinese center. “Demand this year will drop for the first time since 2009 because of the deep contraction in oil consumption in China, and major disruptions to global travel and trade,” the IEA said.

Daniel Yergin, who wrote about the history of the global petroleum industry in “The Prize,” told CNBC: “We are now in a period of true turmoil. Fear is now all-pervasive.”

US investment bank Goldman Sachs said: “We believe the OPEC and Russia oil-price war unequivocally started this weekend when Saudi Arabia aggressively cut the relative price at which it sells its crude by the most in at least 20 years. This completely changes the outlook for the oil and gas markets, in our view, and brings back the playbook of the ‘new oil order’ with low cost producers increasing supply from their spare capacity to force higher cost producers to reduce output.”

The bank cut its forecasts for this year to $30 per barrel for Brent with “possible dips” to near $20, and other global experts agreed. Japanese bank Mitsubishi UFG forecast oil below $30 for “protracted periods,” with markets sporadically testing levels below $25.

However, despite the “generation-defining free-fall,” Mitsubishi said there was a glimmer of hope. “This is not the first time OPEC and its allies have not been aligned on the most appropriate strategy, and both sides have been able to produce workable solutions in the past.”

The market reaction was exacerbated by the surprising turn of events in Vienna at the weekend, when Russia declined to participate in a further round of supply restrictions proposed by Saudi Arabia and other OPEC members.

The Kingdom immediately signaled big discounts to customers around the world via a revised price list from Saudi Aramco.

Bank of America Merrill Lynch said: “We expected Saudi Arabia to unilaterally rebalance the global oil market, yet Saudi abruptly decided to cut back prices to Europe, Asia and the US by the most ever. If the Saudis have cut prices to bring Russia back to the negotiating table, prices could recover a little bit faster. But if the market share war is being waged against US shale, a longer lasting price drop is likely. Prices could even drop into the teens.”

Goldman Sachs said that, at $20 a barrel, US shale and other high cost producers could face “acute financial stress and declining production.”

Others offered a different narrative.

Ellen Wald, US consultant and author of “Saudi Inc.,” said: “This is not a plot by Russia to destroy the US shale industry. It is a fundamental difference in strategy, goals and temperament between Russia and Saudi Arabia that was telegraphed for those willing to see it. There is a misconception in the oil market. They (the producers) do not all want higher prices. They all want more revenue. For some that comes from higher prices but some producers can achieve that through more sales, though not if the price drops 30 percent in one day.”

Some experts believed the turmoil in global oil markets would lead to a major shake-up in the corporate energy sector. All the leading independent oil companies — BP, ExxonMobil and Shell — experienced big share price falls.