Though the global coronavirus outbreak still remains the chief issue of the day, this week we have been following another big story: the crash of the oil market. After Russia refused to comply with OPEC’s latest proposed production cuts last Friday, an out-right price war began, with Saudi Arabia quickly upping production to its highest volume in over four years, causing oil prices to drop more than 30%.
Russia is not an official OPEC member and is thus not obligated to follow through on every decision that OPEC member states approve of. However, the cartel has been relying on voluntary compliance from Russia over the past couple of years, and together the bloc known as OPEC+ had been moderately successful at keeping oil prices steady.
Nevertheless, while OPEC and its allies were cutting production volumes in order to alleviate the oversupplied oil market, the United States kept expanding and producing more and more oil. This allowed the US to become the country with the biggest share of the oil market, which displeased both Russia and Saudi Arabia. The disbalance on the market is the chief reason Russia decided to abandon OPEC’s production cuts plan.
Seeing that both the US and Russia will keep pumping oil, unofficial OPEC leader Saudi Arabia decided to increase its own output levels as well, in the hopes of reclaiming some of the market shares it lost to the United States over the last four years.
The current market situation, however, cannot handle production increases. Remember that in 2015 the oil market was already oversupplied as China’s economic slowdown became more apparent. That was a time when the markets were overall healthier than now.
Fast forward to today, when the world finds itself in the midst of a global pandemic. Travel remains limited around the world, with some countries closing their borders, and others implementing formal travel bans. People are either too scared or not permitted to travel, which has hit airlines and transportation companies especially hard, causing a sharp drop in the demand for oil. As a result, the oil market needs less oil, not more, if it is going to stabilize.
Today oil is trading around $35 per barrel for the Brent crude, and $33 for the WTI brand, and both assets remain volatile.
