New global outbreaks of coronavirus and an erupting oil-price war between Saudi Arabia and Russia sent oil prices on Monday plunging by more than 15 percent from last week and close to 50 percent from the start of the year.
Brent crude, the global benchmark for oil and for U.S. gasoline prices, hovered around $36 a barrel after opening Monday at about $33 -- down from $45 a barrel on Friday and nearly $70 in January. West Texas Intermediate, the bellwether for U.S. shale oil production, was fetching about $32 a barrel, down from $42 on Friday.
“If somebody would’ve told you this 60 days ago, they would’ve been sent to an insane asylum,” said Patrick DeHaan, head of petroleum analysis at GasBuddy.com, which tracks fuel prices.
Prices had been swooning in recent weeks amid the spread of COVID-19, which has undercut already shaky global demand by bringing a halt to travel, tourism and shipping. Market analysts last week revised their outlooks to predict not merely a continued slowdown in oil demand but the largest decline since the 2009 financial crisis.
“First of all, we have a short-term crisis in the coronavirus, and that is now getting to the bad phase, particularly in the United States,” said Steven Kopits, managing director of Princeton Energy Advisors. “As a practical matter, New York City is going to be shut down for now for the next couple weeks, and the East Coast is going to go into a cold freeze. So that means people are going to be away from their desks and money is going to be off the table, and that is going to be a factor driving down oil prices.
Adding to the pain, the wary oil markets partnership between Saudi Arabia and Russia abruptly fractured this weekend, as Moscow refused to go along with production cuts sought by Saudi Arabia and OPEC.
As the Saudis and other OPEC members, dependent on oil revenues to fund their governments, hoped to shore-up sinking prices, Russian leaders were wary of giving an on-ramp for U.S. competitors to re-enter the market: Shale oil production in the U.S., which relies on hydraulic fracturing and horizontal drilling, is more expensive than conventional oil production and needs a higher break-even price.
With Russia declining to go along, Saudi Crown Prince Mohammed bin Salman announced an about-face: Rather than pursuing a production cut to buttress prices, the kingdom would instead slash prices to grab market share, putting the world’s No. 2 and No. 3 oil producers, behind the U.S., at loggerheads.
“It went from a production cut to a production boost at a time when global demand is absolutely plummeting as a result of the coronavirus, so it’s a very unusual set of circumstances playing out,” DeHaan said. “It now looks like a price war between Saudi Arabia and Russia.”
The move by bin Salman may not be related to oil prices alone: Saudi security forces began rounding up members of the royal family, fueling speculation about a possible coup or a bid by bin Salman to consolidate his power even as his aging father, King Salman, remains on the throne.
“It’s reflecting some kind of desperation from Mohammed bin Salman,” Kopits said of the price-cut. “Saudi policy has gone off the deep-end here, with a completely unnecessary show of force in the middle of a global crisis. This is unsustainable for everyone.”
How long the impacts will be felt is far from clear: The number of coronavirus cases in the epidemic’s epicenter, China, appears to be stabilizing, but they’re still growing up in the U.S. as well as Europe -- namely Italy -- and Asian nations such as South Korea. Some experts expect the most acute pain to occur in the next two to six weeks, with oil prices starting to recover as demand returns with the U.S. summer driving season around July 4.
“Oil prices are going to face a short-term crisis period,” Kopits said. “So we’re going to have parts of the East Coast, Manhattan, starting to look like Italy, Korea. So it’s going to be pretty bad. But that acute issue should probably go away in about eight weeks.”
In the meantime, that’s good news for U.S. motorists and for freight companies: The U.S. average gasoline price, about $2.30 a gallon on Monday, is on track to drop below $2 a gallon in the weeks ahead.
“For motorists, no one should be filling up their tanks right now unless absolutely necessary,” DeHaan said.
For U.S. shale oil producers, though, with the additional drop in prices caused by the Saudi ramp-up in production, the pain may be pronounced, stretching into the end of 2020 or into even the start of next year. The biggest factor will be the kingdom’s willingness -- or ability -- to withstand the economic pain.
Saudi Arabia last launched a price war in 2014, then aimed at bumping U.S. shale producers from the market. This sent prices as low as $26 a barrel in 2016. As U.S. oil developers proved more resilient than anticipated, though, the Saudis were ultimately forced to call-off the effort.
“Even now, U.S. shale production isn’t looking so great. Our view is that U.S. shale production had to be restarted in Q2, but that looks like it’s going to be pushed out at least a quarter or two,” Kopits said. But, he added, “It’s a great time to make money. If you like oil, you’re all in. The profit potential with a modest amount of leverage on a years’ basis is 400%. We’re now at $30, and it can go back to $60 -- meaning it can go back to 100%. With modest leverage, it’s a 400% return.”
