Author: Times Finance Liu Muxuan
Due to the double crisis of the collapse of the OPEC+ alliance and the impact of the epidemic, international oil prices closed at 18 years' lows on March 30.
Just as OPEC+'s production cut deadline approached on April 1, Russian President Putin and US President Trump held a conference call on March 30 local time. According to Russian Satellite Network, the Kremlin announced on the 31st local time that the presidents of Russia and the United States believe that the current price situation in the oil market is not in line with the interests of both countries.
In addition, the United States and Russia also discussed trade and the COVID-19 pandemic and agreed to continue dialogue at the leadership level.
On June 28, 2019, Russian President Putin and US President Trump held a bilateral meeting at the G20 summit held in Osaka, Japan. (Photo source: Reuters)
was boosted by this news, with Berry Oil and U.S. oil rising 3% and 6% respectively, but still close to the lows in 18 years.
In response to this, Qian Xuming, associate researcher at the Middle East Research Institute of Shanghai International Studies University and director of the energy research project, told Times Finance on March 31 that the energy consultation between the United States and Russia has provided support to international oil prices so that it will not continue to decline and will form huge support around US$20 per barrel. "But given the current peak of the epidemic in the United States and Europe, even if Saudi Arabia and Russia reach a settlement, it still cannot stop the decline in global oil demand caused by the epidemic."
US shale oil urgently needs to "save"
Trump announced on March 29 that the United States would be extended to April 30, which means that his attitude towards responding to the domestic epidemic in the United States has changed. Coincidentally, Trump's view on the oil dispute between Saudi Arabia and Russia is also different from that in early March.
At that time, Trump compared the plummeting oil price to the "tax cut" of Americans, believing that low gasoline prices are more beneficial than disadvantages to ordinary people, and then purchased a large amount of low-priced crude oil to fill the US strategic oil reserves.
But at the same time, as the world's largest oil producer, the extremely low oil price has left little profit in the US shale oil industry. The isolation measures implemented to control the epidemic have also forced more and more drilling to cut production and shut down.
Just before the March 30 conference call, Trump said that Saudi Arabia and Russia were "crawling" in the oil price war. "I never thought we had to raise the oil price, but it's priced too low right now."
March 23, 2020, the RN-Tuapsinsky refinery operated by Rosneft Oil Co. (Photo source: CNBC)
In this regard, Qian Xuming pointed out that the United States is balancing the pros and cons of the two, "But the current top priority is to stabilize oil prices and prevent shale gas companies from going bankrupt, resulting in a large number of American oil workers being unemployed."
According to CNN, economists in the Federal Reserve's St. Louis area predict that the epidemic will eventually lead to the number of unemployed people in the United States reaching 47 million, and the unemployment rate reaches 32.1%.
Faced with such a large-scale wave of unemployment, the White House had to take various methods to deal with it. In addition, Trump is also facing pressure from the domestic shale oil industry.
Last week, U.S. shale oil industry leaders, trade groups and six senators from oil-producing areas urged U.S. Secretary of State Pompeo to take a tougher stance against Saudi Arabia, while highlighting several "powerful tools" including sanctions, tariffs and other trade restrictions. Texas Senator Cruz said on March 30 local time that he and eight other Republican senators warned that they would seek diplomatic solutions if the oil price war continues. Previously, they had consulted with the Saudi ambassador to the United States many times and wrote letters to Saudi Crown Prince Salman to express their dissatisfaction.
It is worth mentioning that Texas, where the shale oil industry is very developed, is a traditional Republican-supported state, and the internal contradictions caused by the impact of the shale oil industry can be said to have profoundly affected Trump's re-election.
In addition, given that Saudi Arabia has long followed the US strategy, this US-Russia energy dialogue is also considered to be the United States as Saudi Arabia's agent to negotiate with Russia.
However, Qian Xuming believes that the negotiations between the United States and Russia are more due to considering the greater losses to the country's shale oil industry. "Because of the impact of low oil prices, a large number of shale oil and gas companies in the United States have to implement debt restructuring and even face bankruptcy."
In addition, there are also comments that the United States has its own limitations in choosing to conduct energy negotiations with Russia, because the United States has long maintained a strategy of imposing economic sanctions on Russia, and Russia may use the lifting of sanctions as a bargaining chip.
As a donor to the Trump campaign, Eberhart, CEO of drilling services company Canary LLC, said he may have to promise to relax sanctions on Russia if Trump wants to reach a deal with Putin. And he is not sure if Trump can achieve this without Congress’ support.
downward trend is difficult to reverse
As more and more countries around the world take measures to stop work and isolate the epidemic, the manufacturing and transportation industries have stagnated, and global crude oil demand is declining significantly.
In this regard, Yelkin, vice chairman of consulting company IHS Markit and international energy expert, pointed out in an interview with CNBC that the collapse of OPEC+ is only part of the collapse of the crude oil market, and the biggest problem is the new crown epidemic and the shutdown of most economies in the world.
IHS Markit estimates global gasoline, diesel and jet fuel consumption fell by nearly 20% year-on-year this month, while the decline in April is expected to be about 30%. In terms of quantity, global oil consumption fell by 367 million barrels in March, while in April it is expected to drop by 553 million barrels.
"Cars are not on the road, planes are not in the sky, factories are not in production, people are not working... In the upcoming April, global oil demand may drop by 20 million barrels per day year-on-year. This will be six times lower than the biggest oil demand recession during the 2008 financial crisis," Yelkin said.
At the same time, Goldman Sachs Group also estimated on March 30 that global daily crude oil consumption will drop by 26 million barrels this week.
Previously, according to the official forecast of OPEC (Organization of Petroleum Exporting Countries), world oil demand in 2019 was about 99.67 million barrels per day. This means that global daily oil demand in April will fall by 20%.
China's manufacturing PMI index trend since March 2019. (Photo source: National Bureau of Statistics)
As the world's first country to control the epidemic, China's manufacturing recovery may become a pioneer in driving global crude oil demand.
China National Bureau of Statistics announced the March manufacturing PMI, non-manufacturing business activity index and comprehensive PMI output index on March 31, which was higher than expected based on the sharply lowered base in February.
But for the global oil price market, Qian Xuming emphasized that since China's domestic epidemic prevention and control has moved to the stage of "preventing imports from outside and rebound from inside", its motivation to drive global oil prices to rise is limited.
Oil inventory in various countries is close to "explosive stocks".
Faced with the environment of low oil prices, many countries or regions, like the United States, have considered taking the opportunity to purchase large quantities as strategic reserves, but in fact, the global oil storage capacity is also limited.
According to IHS Markit's forecast, global crude oil supply will exceed demand by 1.8 billion barrels in the first half of this year.
"This is an amazing number," said Yelkin, whose previous record was a surplus of 350 million barrels in the first half of 2015.
Six months of global crude oil inventories surplus/deficit chart since 2000. (Photo source: IHS Markit official website)
But in comparison, IHS Markit estimates that the current global available crude oil storage capacity is only about 1.6 billion barrels. This means that more crude oil may be refined into finished products and subsequently stored.
"The inevitable fact is that without the expected decrease in supply or the expected increase in demand, then by the end of next month, there will be a serious bottleneck in the global crude oil value chain." Yelkin emphasized.
It is reported that crude oil can be stored almost indefinitely, with diesel or jet fuel having a shelf life of about one year, while gasoline storage cycle is about three months.
Given that both supply and demand have been hit, Freeman, an analyst at asset management firm Ruijie Financial Group, also said: "Global crude oil warehousing is likely to reach its limit in the second quarter of this year, which provides more possibilities for crude oil prices to reach US$10/."
Global crude oil futures prices have fallen by more than 50% since the beginning of this year. As of 18:00 on March 31, Beijing time, Brent Oil rose 3.07%, closing at US$27.23 per barrel, while US oil closed at 6.12%, closing at US$21.32 per barrel, returning to the US$20 line.
In addition to the three oil production giants, Saudi Arabia, Russia and the United States, the crisis facing crude oil price markets in other countries may be more serious.
Canadian WCS crude oil is already cheaper than beer locally. (Photo source: Bloomberg)
For example, Canadian WCS crude oil fell to $4.18 per barrel on March 30, even cheaper than local beer.
Even so, Saudi Arabia still does not seem to mean a "ceasefire".
According to the Associated Press, Saudi Arabia's Ministry of Energy said on March 30 that due to the reduction in domestic consumption, Saudi Arabia plans to increase its oil exports to 10.6 million barrels per day from May.
Previously, after the OPEC+ production cut agreement broke down in March, Saudi Arabia planned to increase crude oil exports to 10 million barrels per day starting in April.
