Oil prices crash 56% amid coronavirus breakout, production cut may provide relief in FY21

Oil prices crash 56% amid coronavirus breakout, production cut may provide relief in FY21By Anuj Gupta

WTI Crude prices dipped over 56 per cent in March’20. Oil prices plunged after the coronavirus breakout led to a demand crash amid rising worries of a possible supply glut. The massive fall in oil prices came after the price war triggered between top oil producers, Saudi Arabia and Russia. Saudi Arabia announced its plans to boost production in April’20 in the race to win the market share. The coronavirus has killed over 65,000 people and multiple nations have announced a lockdown which has led to curtailment of the aviation and road transport, in turn, denting the demand for crude. The World Health Organization (WHO) declared the coronavirus as a global emergency after the death toll in China reached 460 and the virus infecting over 20,000 people. The global economy hit worst since the 1930s.

As COVID-19 strips global oil demand down to 20 to 30 mb/d decline to disastrous levels with predictions for worse to come. With demand dropping suddenly, refineries have had to curtail the production of refined products. That has led to oil-backed up in pipelines and at the wellhead. As per the Baker Hughes reported on Thursday that the number of oil and gas rigs in the US fell again this week by 62, falling to 602, with the total oil and gas rigs clocking in at 420 fewer than this time last year. The steep downward trajectory of the active rig counts over the last four weeks indicates that the widespread lockdown world-wide decimated the oil demand. Canada’s overall rig count decreased by 6 rigs as well this week, to a total of just 35 rigs. Oil and gas rigs in Canada are now down 31 numbers year on year.

In India who is the second number consumer of crude oil shows that oil demand has plunged by 70 per cent as the country has gone into lockdown. Meanwhile, in the U.S., gasoline demand fell to 5 mb/d in the U.S. from 9.6 mb/d three weeks earlier.

Gasoline inventories in the United States continue to climb, along with crude oil inventory builds. During the latest reporting week, to April 3, U.S. oil inventories swelled by 15.2 million barrels, the EIA said on Wednesday, a week after reporting the largest oil inventory build since 2016. The EIA also reported gasoline inventories had increased by 10.5 million barrels and distillate fuel inventories had added 476,000 barrels. This compared with a gasoline inventory increase of 7.5 million barrels for the previous week and a distillate fuel inventory fall of 2.2 million barrels. (Source – EIA)

The EIA’s estimate for the week is that oil production in the United States fell to 12.4 million barrels of oil per day on average this week, which is 600,000 bpd off the all-time high. It is the lowest production level since September last year.

OPEC led by Saudi Arabia and its allies led by Russia, which together make up the informal OPEC+ group, to curb crude production by 10 million barrels per day (bpd) or 10% of global supplies in marathon talks on Thursday. Although Russia and OPEC said they wanted other producers including the United States and Canada to cut a further 5%.

There is a prediction that U.S. output could fall by between 2 million and 3 million bpd by the end of 2020. U.S oil production fell by 600,000 bpd last week, evidence that the hit to output has already begun. The U.S. EIA predicted that oil production could decline by 0.5 mb/d in 2020 and potentially by 0.7 mb/d in 2021.

Flood of Saudi oil heading to U.S. Saudi Arabia is sending “a flood” of oil to the U.S. Gulf Coast, according to Bloomberg, with an estimated 14 million barrels en route, compared to just 2 million barrels a month ago.

Global oil consumption was expected to fall by a record-breaking 12 million bpd (12%) in Q1 2020, according to the Bank of America. And we’re just getting started. As demand requires more or fewer barrels, OPEC+ would assume 80% share and the U.S. 20% of the change, in line with each party’s respective share of overall global supplies.Looking towards the big mismatch in demand and supply the coming session would be very volatile for crude oil prices. In US oil inventories on record high and US also looking to put a tariff on the imported crude oil in the US. However, the OPEC+ members are also wanting to take advantage of the crude oil falling prices to give discounts to increase their market shares.

For the year 2021, we are expecting that crude oil prices may average between $30 to $40 as COVID – 19 strips global crude oil demand.  Many crude oil production companies and refineries have also shut down due to the mounting losses and employees have lost their jobs in these companies. However production cut may provide some supports to the crude oil market.

Till the last of 2020, we are not expecting much upside in crude oil prices as the demand will not increase substantially as due to COVID-19 the charm of travelling may be diluted. The aviation companies also may cut their flights from world travel locations.

(Anuj Gupta is Deputy VP- Research at Angel Broking Ltd. Views expressed are the author’s own)