Oil prices extending losses amid output cut

Andrew Cummings
March 17, 2020

The coronavirus has caused Chinese demand for oil to drop, causing a shift in the oil market.

Last week's price war began after Saudi Arabia and other members of the OPEC oil cartel pushed for an output cut to combat the impact of the virus outbreak. Negative drivers on the supply side come from the ongoing Russia-Saudi Arabia price war, which is expected to remain unabated in the near-term and aggravated by the tangible possibility that Saudi Arabia ramps up its oil production by almost 12M bpd.

"The last time that there was a global surplus of this magnitude was never. If this situation persists amidst a recession, it points to the possible buildup of the most extreme global oil supply surplus ever recorded", said Jim Burkhard, vice president and head of oil markets at energy consultancy IHS Markit.

The coronavirus outbreak has shaken the oil market fundamentals, depressing demand prospects despite OPEC and non-OPEC countries cutting supplies.

IHS Markit warned on Monday that the global crude surplus could range from 800 million to 1.3 billion barrels in the first six months of 2020.

An OPEC and non-OPEC technical meeting planned for Wednesday in Vienna has been called off as attempts to mediate between Saudi Arabia and Russian Federation after the collapse of their supply cut pact made no progress, sources said.

Central banks globally took action over the weekend to try to quell 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.

Also, the "extraordinary" decision by the U.S. Federal Reserve to slash interest rates to zero per cent may have rattled the broader market, Nieboer said.

"If we talk about the long term, then crude oil may bounce back from lower levels but the upside will remain limited due to higher supply, which is going to be a long term positive for the Indian market", he said.

"Some of them (U.S. shale oil companies) may not survive prolonged low oil prices, and in this event USA production would decrease. Less crude availability in the USA is likely to reduce the WTI discount to Brent", Societe Generale analysts in a note to clients.

Reuters reported that Saudi Aramco has said this week it would likely carry over its planned higher oil output for April into the following month, and that it was "very comfortable" with an oil price of US$30 a barrel. The move is aimed to help energy producers struggling from the price plunge.

The United State now has more than 450 million barrels in crude storage, not including strategic reserves.

The Saudis reportedly said they would be lifting production to a daily top of 13 million barrels, up around 3 million, while the UAE said it would lift output by a million barrels a day to 4 million.

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