Last week, OPEC and Russia unexpectedly suspended production reduction negotiations, and Saudi Arabia took the lead in announcing an expansion of production to start an oil price war… A series of news was like a bombshell, stirring up the capital market. The international crude oil market almost started with a “crash” on Monday, with WTI crude oil futures prices falling to US$28 per barrel, a drop of more than 30%.
Reduction in production Change to increase production, OPEC negotiations break down
As the spread of the new coronavirus pneumonia epidemic intensified market concerns about weak crude oil demand, oil prices continued to fall and entered a technical bear market in early February. As the largest oil producer in OPEC, Saudi Arabia has been urging OPEC and its allies led by Russia to deepen production cuts to support oil prices.
It is worth noting that OPEC+’s current production reduction agreement will expire at the end of March. OPEC issued a statement on March 5 that it would recommend to OPEC+, including Russia, to reduce production by an additional 1.5 million barrels per day until the end of 2020, which is equivalent to about 1.5% of global demand.
Last week’s OPEC+ policy meeting ended in failure. It neither reached an extension of the existing production reduction agreement nor agreed to further expand production cuts. This means that from April 1, both OPEC and non-OPEC oil-producing countries such as Russia can produce freely, which may cause oil prices to plummet further. Iranian Oil Minister Zanganeh said after the meeting that this was one of the worst meetings in the history of OPEC that I have ever seen. Russia and Saudi Arabia failed to reach an agreement after six hours of private negotiations. Some OPEC members insist on allowing non-OPEC members to join the production reduction agreement. On March 6, Brent and WTI crude oil futures both fell nearly 9%, recording their largest single-day decline in five years.
On March 6, the OPEC+ Vienna meeting did not reach any agreement for the first time in six years! As former allies, Saudi Arabia and Russia suddenly broke up, which may lead to the threat of disintegration of OPEC+, the most important stable alliance in the oil market in recent years.
Saudi Arabia makes a surprising move: the crude oil price war begins
On March 7, Saudi Arabia made an astonishing move and fully launched a global crude oil price war: First, Saudi Arabia significantly lowered the price of crude oil sold to foreign markets such as Europe, the Far East, and the United States. The discount was the largest in more than 20 years to attract crude oil prices. Foreign refineries buy Saudi crude oil.
The statement documents show that the price of crude oil sold to Asia in April was reduced by 4-6 US dollars per barrel; the price of crude oil sold to the United States in April was reduced by 7 US dollars per barrel. It’s worth noting that these are unprecedented discounts. The most surprising thing, however, is that the discount on flagship Arabian Light crude oil to northwest European refiners widened to $8/barrel, selling for as low as $10.25/barrel. By comparison, similar Russian crude prices have only been able to fall by about $2 at best.
While reducing prices, Saudi Arabia also privately informed market participants that it would increase production if necessary. Saudi Arabia’s crude oil production in April may increase from about 9.7 million barrels per day this month. increased to 10 million barrels per day, and even reached a record level of 12 million barrels per day.
Global capital market riots
After Saudi Arabia announced its decision, Middle East stock markets Then it collapsed. After the opening on March 8, stock indexes across the Middle East plummeted across the board – Saudi Arabia’s TASI index fell 7.15% at the opening, Israel’s TA35 index fell 5.36%, Dubai DFM index fell 7.51%, Abu Dhabi ADX index fell 5.88%, Cairo EGX30 index, Doha index Stock indexes fell more than 3%. Kuwait’s KWSEMP index fell by more than 10%, triggering a circuit breaker. The Kuwait Stock Exchange announced that it would suspend all trading for the remainder of the day.
U.S. stock index futures fell sharply, and Dow futures once fell by more than a thousand points. Safe-haven gold and the Japanese yen rose sharply, with gold prices once reaching the $1,700 mark and the U.S. dollar index falling sharply to 95.38.
At the same time, hit by the plunge in oil prices, the Australian stock market suffered its largest decline since 2008. The Australian stock market opened down more than 4% on Monday as a crude oil price war dealt a blow to a global economy already further fragile due to the epidemic. The Nikkei 225 index’s decline expanded to 4%, setting a new low in 6 and a half months.
On March 9, most domestic futures markets fell in early trading, with energy and chemicals leading the decline. Fuel, asphalt, crude oil, PTA, methanol, and ethylene glycol all closed down at their lower limits; black Most of them fell, with iron ore falling by more than 4%, stainless steel falling by more than 3%, and coke falling by more than 2%; most basic metals fell, with Shanghai zinc and Shanghai nickel falling by more than 3%, and Shanghai copper falling by more than 2%; precious metals were mixed. Now, Shanghai gold has risen, while Shanghai silver has fallen by more than 1%; most agricultural products have fallen, with palm oil, rapeseed oil, soybeans and soybean oil falling by the limit.
What will happen in the future?
At present, on the one hand, the spread of the new coronavirus epidemic around the world will lead to a slowdown in global crude oil demand growth. At this time, Saudi Arabia is taking the lead in increasing production and launching a price war, which is expected to intensify in the second quarter. Oversupply situation in the crude oil market, crude oil inventoriesAgainst the background of continued growth, short-term oil prices still have downward risks. Goldman Sachs lowered its Brent crude oil price forecast for the second and third quarters of 2020 to $30/barrel and warned that oil prices “could fall” to around $20/barrel.
The direct cause of this round of oil price decline is the sharp rise in market risk aversion and the decline in crude oil demand caused by the epidemic. Crude oil is a risky asset and will naturally be under pressure when the expected demand outlook is pessimistic. The recent failure of the production reduction alliance to reach a new production reduction agreement has intensified the bearish atmosphere in the market to a certain extent.
At the same time, under the expectation of declining demand and increasing supply, the market expects that the contradiction between supply and demand of crude oil will become more prominent in the future. Currently, there are problems on the market sentiment, demand side, and supply side that cannot be solved in a short time, which strengthens the market’s bearish consensus on oil prices. </p
