Just this morning WTI crude fell below its previous February 2016 lows at $26.21, and prices are now heading towards the $25.50 mark, levels not seen for over 17 years. A perfect storm has crushed crude prices over the course of the last month - concerns of a global recession due to Covid-19 and the Saudi/Russian price war.
Let’s start with Covid-19 - In late February, the rate at which the virus was spreading internationally began to rapidly pick up. In a matter of days, what many had thought was a “China problem” was now a global problem.
Rather than just having to price in some slowing of growth in Western economies due to supply chain disruptions (because of Chinese factory closures), markets quickly had to adjust to the new reality: Covid-19 looked set to disrupt the global economy. As such, risk assets, including crude prices, were hammered and that hammering has not let up.
Every day, developed economies are taking more and more drastic social distancing measures as they try to stem the spread of the virus. Whether or not there will be a global recession is no longer the question. The question now is how deep and long-lasting the recession will be.
In terms of what this means for crude oil markets; it does not look like demand for fuel will be going up any time soon. Therefore, from the demand side at least, crude looks set to remain under pressure. The Russia/Saudi price war - Probably the worst timed price war in history. After Russia refused to deepen oil cuts at the most recent OPEC+ meeting a week and a half ago, the Saudis have launched a full-scale price war.
They offered deep discounts to customers and will be upping production to 13mln BPD from below 10mln BPD. In response, the Russians will also be upping production by around 500k BPD.So the market is being flooded with supply just at a time when demand is taking a sharp hit. No wonder crude is at 17-year lows!
Outlook for crude
For crude prices to receive any meaningful lift in the coming months, one of two things needs to happen.
OPEC+ needs to at least agree to a ceasefire, i.e. Russians and Saudis unwind their huge production increases. Such an agreement may be good for $10 in WTI and Brent. If they want further upside, agreeing to further cuts will be needed.
Covid-19 needs to be in the back mirror; maybe a vaccine gets developed. Maybe we all get it and there is enough herd immunity to stop the spread. But we need to get to the point where normal life can be safely resumed… assuming authorities manage to prevent a financial crisis!
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