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Unprecedented Oil Crisis: onsequences of the Price War between Saudi Arabia and Russia
April 20, 2020 18:34

The coronavirus epidemic has led to an unprecedented drop in demand for raw materials and a collapse in quotations. The market situation may force oil producers to tighten the valve more, and ultimately this may lead to higher oil prices. However, this will happen only after the global economy recovers from the losses of the coronavirus, Rainer Michael Price, Investment Director of The Global CIO Office believes.

The war of Saudi Arabia and Russia for dominance in the oil market ended in general defeat. The world oil market is experiencing a large-scale shock of demand, while the demand for transport fuel is at risk due to the coronavirus crisis. At the same time, large oil producers entered the battle for share in the oil market, which led to a significant supply shock. In a world where everything has stopped, the price of oil is likely to move in only one direction - down.

The recent announcement of a reduction in oil production, although unprecedented, was made too late to offset the shock of demand due to COVID-19. As global oil producers continue to flood the market with raw materials, we are increasingly faced with a situation in which we are not just flooded with oil - we have nowhere to store it. This is an unprecedented oil crisis, and as the situation worsens, the wrong side of markets, international relations, and geopolitics become visible, as demonstrated by the recent conflict between the Crown Prince of Saudi Arabia, Mohammed Ibn Salman Al Saud, and Russian President Vladimir Putin.

According to the International Energy Agency (IEA), global oil demand in 2020 will fall by a record 9.3 million barrels per day, which will nullify a decade of growth in consumption.

The IMF expects the global economy to shrink by 3% this year. The economies of Asia’s largest trading partners are expected to sag significantly: the US economy will shrink by 5.9%, while the entire eurozone - by 7.5%. China is one of the few economies that the fund believes can grow this year. However, the growth of 1.2%, projected by the IMF, is a significant slowdown compared with the results of China's economic development in past years.

However, paradoxically, the shock of demand can ultimately create an inflationary shock in the supply of oil of unprecedented proportions, because there will be a need to stop oil production. The real oil market, where millions of barrels of raw materials are sold daily, needed unprecedented restrictions on world oil production by OPEC + a few months ago. After endless nights of debate in Vienna on April 12, the Organization of Petroleum Exporting Countries (OPEC), led by Saudi Arabia, and its allies, led by Russia, announced that they would limit production by almost 10 million barrels a day from May to June - the largest reduction in history. Moreover, countries said they would continue to hold back production, albeit less severely, for two full years.

The shock of oil supply increasingly seems a trifle amid the growing shock of demand caused by COVID-19. Therefore, regardless of the further actions of OPEC +, the world is moving towards the market with an incredible excess of supply and a period of significantly reduced oil prices. The speed of recovery in oil prices depends mainly on how the virus will spread and what measures will be taken to contain it.

The current unprecedented shock in oil demand and the collapse in prices caused by it can lead to a large negative supply shock and skyrocketing prices. This destructive process can leave an indelible mark on the global energy sector and related geopolitical processes, create inflationary pressures when economic activity begins to recover.

The global consequences of the shutdown of enterprises caused by COVID-19 are still completely unclear, which means it is not known when the period of low oil prices will end.

The main distinguishing feature of the oil market is its physical component. Oil is not like stocks, and confidence will not help here. Persistence will not allow you to cope with a real excess of oil in the amount of 5 million barrels per day. You will not convince the oil market to grow and stay at the right level. Because, in the end, there is supply and demand in the oil market, and physical raw materials are the basis of everything. This is the main difference between this market and, say, the stock market. It can be concluded that the likelihood of a V-shaped increase in demand for raw materials is small even under the condition of a V-shaped recovery of the global stock market.

Author: Anna Dorozhkina

Tags: coronavirus Russian oil Russian economy Russia international  

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