Oil falls to $30 on recession fears and Saudi pump war

Andrew Cummings
March 17, 2020

Oil rose more than US$1 on Tuesday as bargain hunters emerged after recent sharp falls due to the coronavirus pandemic and the price war between Saudi Arabia and Russian Federation, but fears of a recession still dragged on the market.

Brent crude was up by 1.8 per cent, or 55 cents, to US$30.60 a barrel by 0410 GMT, after hitting a high of US$31.25.

If that weren't enough, Saudi Arabia and Russian Federation have been engaged in an oil price war after the latter refused to join OPEC in cutting production, causing the former to dramatically lower the price of oil for its customers and raise output.

This month, the Organization of the Petroleum Countries (OPEC) and Russian Federation failed to extend production cuts that began in January 2017 aimed at supporting prices and lowering stockpiles. Until now, the largest six-month global surplus since 2000 was from late 2015 to early 2016, when it was a cumulative 360 million barrels, it said. Brent, the London-traded global benchmark for oil, finished down $3.80, or 11 percent, at $30.05 per barrel.

"Oil has made new lows", said Tamas Varga of oil broker PVM.

The world is looking at the "possible buildup of the most extreme global oil supply surplus ever recorded", IHS Markit said in a report on Monday.

The Fed slashed its key rate on Sunday to near zero.

In China, where the virus began, daily refinery throughputs dropped 4.8 percent in the first two months of the year, sliding to the lowest level since December 2018, data from the National Bureau of Statistics showed on Monday.

Central banks globally took action over the weekend to try to quell the economic fallout of the pandemic, but the measures did little to strengthen stock markets in freefall, as investors anticipate a sharp contraction in demand in coming weeks anyway.

Numerous US oil companies have swiftly cut spending, with analysts anticipating consolidation or restructurings.

"Some of them (US shale oil companies) may not survive prolonged low oil prices, and in this event United States production would decrease".

That will see up to $US50 billion in spending and other measures, free COVID-19 testing (but not treatment), sick pay for some workers, waiving of interest on student loans, and importantly for oil markets, purchases of crude for the United States strategic reserve.

While much of the focus has been on the crude oil market, which received a small boost from President Trump ordering the U.S. Strategic Petroleum Reserve to buy crude at depressed prices, the declining demand for gasoline has flown under the radar. However, the purchases are not seen as likely to offset the drop in demand nor the increase in supply, Energy Aspects said in a note.

Saudi Arabia's national oil company, Aramco, has declared its intention to increase to 13 million barrels per day from April while Russian Federation said it could also increase its output to 12 million barrel daily.

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