Politicians Claim Lower Oil Prices Are Bad - Granite Grok

Politicians Claim Lower Oil Prices Are Bad

Deadliness of the lockdowns

The price of U.S. oil is dropping.  It stands at an 18-year low. Demand continues to decline as the world’s economy grinds to a halt. Much of the world is in lockdown.

The coronavirus pandemic rages on and the demand for oil is declining rapidly. In the face of declining demand Saudi Arabia and other OPEC+ nations are preparing to ramp up production.

Demand is down

People aren’t travelling. Business has slowed. Those things are reducing the need for jet fuel and gasoline. U.S. West Texas Intermediate crude opened the week falling to its lowest level since February 2002. The contract price hit a session low of $19.27 per barrel. International benchmark Brent crude fell to $22.76 per barrel, a price last seen in 2002.

The drop-off in demand comes as OPEC+ production level commitments expire. As demand wanes, OPEC earlier this month proposed additional cuts of 1.5 million barrels per day. But OPEC ally Russia is refusing to comply. Beginning April 1 the 14 member cartel and its allies will be able to pump as much oil as they please.

The Russian break with the cartel began a price war. The kingdom slashed its official oil prices. The Saudis say they will ramp up production. The Saudis are going to 12.3 million barrels per day in April from 9.7 million bpd under the commitment system. Given the hit to both supply and demand, analysts are projecting there could still be more downside ahead in oil prices.

Market expectations

Raymond James analyst John Freeman said, “… it’s likely global crude storage capacity maxes out in 2Q20… creating a nightmarish scenario and the possibility that crude could test the $10/bbl threshold…” Bank of America downgraded its oil price forecasts on Monday. It expects to see both contracts “temporarily trading in the teens in the coming weeks… On a quarterly basis, we expect to see the steepest decline in global oil consumption ever recorded… ” the firm’s analyst Francisco Blanch added.

Oil’s swift and steep decline is causing energy companies to slash capital spending plans. American exploration and production companies have been among those hardest hit. These companies are struggling. Their breakeven is closer to $50/bbl. The dropping oil prices are likely to cause a wave of consolidation and bankruptcies.

Rystad Energy’s head of oil markets Bjornar Tonhaugen said: The oil market supply chains are broken due to the unbelievably large losses in oil demand… This is forcing all available alternatives of supply chain adjustments to take place during April and May. Look for an onshore product storage surge. Refinery run rate cuts globally are coming. There will be a massive increase in floating storage deals and upstream supply shut-ins. The firm expects demand to fall by more than 16 million barrels per day in April.

U.S. involvement… good or bad or just unnecessary

The U.S. has tried to intervene in the dispute. President Trump spoke with Russian leader Vladimir Putin. The two agreed to hold talks on the oil market at the ministerial level, according to Reuters. U.S. Senators recently ripped into the Saudi ambassador in a conference call over the ongoing price war.

The Senators warn that they would take action against Saudi Arabia if the “economic warfare” continues.  No specific retaliatory measure was cited. The U.S. State Department confirms Secretary Pompeo had talks with Saudi Crown Prince Mohammed bin Salman. The President has said the U.S. has “a lot of power over the situation” and would get involved “at the appropriate time.”

Politicians claim lower oil prices are bad which sure seems counter-intuitive. When the price of oil goes down the price of gas goes down and the price of all product made from oil go down. When prices go down it helps the household budget. Yes, U.S. oil producers are going to shut down until rational pricing returns. Shouldn’t America be buying all the Oil Russia and the Saudis want to pump at these fire-sale prices? What’s wrong with that?