Energy markets headed into uncharted territory as crude prices slump

Equity markets collapsed March 9 as the rapidly spreading coronavirus fans fears over the global economy, while a crash in oil prices added to the panic with energy firms taking a hammering. (AFP)
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Updated 10 March 2020

Energy markets headed into uncharted territory as crude prices slump

  • Leading financial analysts warn that further falls are in the offing

DUBAI: Global energy markets are heading into uncharted territory, experts warned, as the instant effect of the apparent end of cooperation between Saudi Arabia and Russia on limiting crude output began to be felt amid ongoing coronavirus concerns.

Prices for Brent and West Texas Intermediate crude — the two leading benchmarks on global oil markets — fell by the biggest daily proportion in nearly 30 years, as leading financial analysts warned that further falls were in the offing.

By the close of trading in the Middle East, Brent stood at $35.61 per barrel, down nearly 22 percent, with WTI at $32.45, down 23 per cent, having been almost 30 percent down earlier in the trading cycle.

Adding to the downward pressure on crude prices, the International Energy Agency (IEA) slashed its forecasts for oil demand this year as the coronavirus outbreak spread beyond its Chinese center. “Demand this year will drop for the first time since 2009 because of the deep contraction in oil consumption in China, and major disruptions to global travel and trade,” the IEA said.

Daniel Yergin, who wrote about the history of the global petroleum industry in “The Prize,” told CNBC: “We are now in a period of true turmoil. Fear is now all-pervasive.”

US investment bank Goldman Sachs said: “We believe the OPEC and Russia oil-price war unequivocally started this weekend when Saudi Arabia aggressively cut the relative price at which it sells its crude by the most in at least 20 years. This completely changes the outlook for the oil and gas markets, in our view, and brings back the playbook of the ‘new oil order’ with low cost producers increasing supply from their spare capacity to force higher cost producers to reduce output.”

The bank cut its forecasts for this year to $30 per barrel for Brent with “possible dips” to near $20, and other global experts agreed. Japanese bank Mitsubishi UFG forecast oil below $30 for “protracted periods,” with markets sporadically testing levels below $25.

However, despite the “generation-defining free-fall,” Mitsubishi said there was a glimmer of hope. “This is not the first time OPEC and its allies have not been aligned on the most appropriate strategy, and both sides have been able to produce workable solutions in the past.”

The market reaction was exacerbated by the surprising turn of events in Vienna at the weekend, when Russia declined to participate in a further round of supply restrictions proposed by Saudi Arabia and other OPEC members.

The Kingdom immediately signaled big discounts to customers around the world via a revised price list from Saudi Aramco.

Bank of America Merrill Lynch said: “We expected Saudi Arabia to unilaterally rebalance the global oil market, yet Saudi abruptly decided to cut back prices to Europe, Asia and the US by the most ever. If the Saudis have cut prices to bring Russia back to the negotiating table, prices could recover a little bit faster. But if the market share war is being waged against US shale, a longer lasting price drop is likely. Prices could even drop into the teens.”

Goldman Sachs said that, at $20 a barrel, US shale and other high cost producers could face “acute financial stress and declining production.”

Others offered a different narrative. 

Ellen Wald, US consultant and author of “Saudi Inc.,” said: “This is not a plot by Russia to destroy the US shale industry. It is a fundamental difference in strategy, goals and temperament between Russia and Saudi Arabia that was telegraphed for those willing to see it. There is a misconception in the oil market. They (the producers) do not all want higher prices. They all want more revenue. For some that comes from higher prices but some producers can achieve that through more sales, though not if the price drops 30 percent in one day.”

Some experts believed the turmoil in global oil markets would lead to a major shake-up in the corporate energy sector. All the leading independent oil companies — BP, ExxonMobil and Shell — experienced big share price falls.



G20 ministers agree to keep markets open, tackle pandemic supply disruptions

Updated 13 min 49 sec ago

G20 ministers agree to keep markets open, tackle pandemic supply disruptions

  • G20 leaders pledged last week to inject over $5 trillion into the global economy to limit job and income losses from the coronavirus outbreak
  • The coronavirus has infected nearly 738,500 people worldwide and killed some 35,000

RIYADH/WASHINGTON: Trade ministers from the Group of 20 major economies agreed on Monday to keep their markets open and ensure the continued flow of vital medical supplies, equipment and other essential goods as the world battles the deadly coronavirus pandemic.
G20 leaders pledged last week to inject over $5 trillion into the global economy to limit job and income losses from the coronavirus outbreak, while working to ease supply disruptions caused by border closures by national governments anxious to limit transmission of the virus.
In a joint statement issued after a videoconference, the trade ministers pledged to take “immediate necessary measures” to facilitate trade, incentivize additional production of equipment and drugs, and minimize supply chain disruptions.
They agreed that all emergency measures should be “targeted, proportionate, transparent, and temporary,” while sticking to World Trade Organization (WTO) rules and not creating “unnecessary barriers” to trade.
They also vowed to work to prevent profiteering and unjustified price increases, and keep supplies flowing on an affordable and equitable basis.
“As we fight the pandemic both individually and collectively and seek to mitigate its impacts on international trade and investment, we will continue to work together to deliver a free, fair, non-discriminatory, transparent, predictable and stable trade and investment environment, and to keep our markets open,” the ministers said.
They agreed to notify the WTO about any trade-related measures taken to keep global supply chains running and said they would convene again as necessary.
The ministers, however, stopped short of explicitly calling for an end to export bans that many countries, including G20 members France, Germany and India, have enacted on drugs and medical supplies. A key adviser to US President Donald Trump is working on new rules to expand “Buy America” mandates to the medical equipment and pharmaceutical sectors, something that dozens of business groups said could worsen shortages.
The joint statement included the phrase “consistent with national requirements” already used by G20 leaders, which experts say could provide a loophole for protectionist barriers.
Lack of protective medical gear is putting doctors and nurses at risk. Many countries rely on China, the source of the outbreak, for drug ingredients and are struggling to avoid shortages after lockdown measures prompted by the epidemic held up supplies and delayed shipments.
Supply chains are backing up as air freight capacity plunges and companies struggle to find truck drivers and shipping crews. Europe and the United States are short of tens of thousands of freight containers. Shippers struggle with crew shortages and quarantines at ports. Agriculture is also being disrupted.
The ministerial video conference was attended by representatives from the WTO, World Health Organization and Organization for Economic Cooperation and Development.
A senior World Bank official urged G20 members to agree to refrain from imposing new export restrictions on critical medical supplies, food or other key products, and to eliminate or reduce tariffs on imports of key products.
US Trade Representative Robert Lighthizer told the ministers during the meeting that the pandemic had revealed vulnerabilities in the US economy caused by over-dependence on cheap medical supplies from other countries. He did not reference the “Buy America” rule specifically, but said Washington was encouraging diversification and wanted to promote more domestic manufacturing to produce more suppliers for the United States and others.
G20 finance ministers and central bankers will also meet virtually, on Tuesday, for the second time in just over a week to continue coordinating their response, the Saudi G20 secretariat said, as worries grow about the debt crisis looming over poorer countries.
Japanese Trade Minister Hiroshi Kajiyama told counterparts that both the public and private sectors should try to avoid shutting supply networks to enable an early resumption of economic activities.
The coronavirus has infected nearly 738,500 people worldwide and killed some 35,000, and has plunged the world into a global recession, according to International Monetary Fund chief Kristalina Georgieva.