Travel and business slowdowns across the world, in response to the novel coronavirus (COVID-19) pandemic, have caused a sharp decrease in global oil demand and the lowest oil prices in 17 years.
On March 5, members of the Organization of the Petroleum Exporting Countries attempted to reach a deal that would extend the current 1.5 million barrels per day (MB/D) production cut in an effort to shore up prices. The talks failed, however, when Russian and Saudi energy ministers were unable to reach an agreement. Russian officials subsequently announced significant increases in their production levels, with Saudi ministers following suit soon after. In the days following, prices in the global oil markets cratered. Crude prices have now plunged from $61.06/barrel at the end of 2019 to $25.44 per barrel on March 18. Some experts forecast that prices could continue to drop.
Though sparked by a drop in demand due to COVID-19, many say a price war has been a long time in the making as Russia is eager to address the growth of U.S. tight oil production. At current market prices, the majority of U.S. shale-oil producers simply aren’t profitable. While the U.S. shale industry is hedged enough for 2020, most firms are just now starting to hedge for 2021. This means, in the event of a protracted trade war, U.S. producers face a loss of market share, significant cuts to production, layoffs, and significant pain for individual companies leading to the potential for consolidation in the industry.
In an effort to help mitigate the damage to the industry, President Trump announced that the federal government will buy large quantities of crude in order to fill the strategic petroleum reserve. Filling the reserve, which must pass Congress, would represent a demand of 0.5 MB/D for six months at current storage capacity, far short of the existing 6 MB/D surplus, according to Goldman Sachs. A group of U.S. senators has urged Saudi Arabian officials to review their plans to increase production and end the trade war in light of the global COVID-19 pandemic, but with Russia appearing “unlikely to blink,” the kingdom has little incentive to do so.