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Coronavirus threat may push oil below $20/bbl: Experts

Virus lowering daily economic activity, negatively impacting oil demand, says expert

Ovunc Kutlu and Nuran Erkul Kaya   | 30.03.2020
Coronavirus threat may push oil below $20/bbl: Experts


As the spread of novel coronavirus (Covid-19) continues to keep global oil demand low, coupled with additional oil that will join the flood which is already sweeping the market in April, crude oil prices now face the risk of falling below $20 per barrel, according to experts.

Due to coronavirus-related weak oil demand and the Saudi-Russian price war for a larger share in the global oil market, price of the international benchmark Brent crude declined below $25 per barrel on March 18.

Although the governments try to stimulate economies by fiscal policies and central banks by monetary policies, crude oil prices are trading below $30 per barrel since March 16.

As long as Covid-19 continues to keep pressure on world economies and the oil market, it is possible for crude prices to plummet below $20 per barrel in short-term and even dive below the $10 a barrel mark, experts warn.

"The challenge is that no one can use oil or the fuel that it makes," Ed Hirs, an energy economist at the University of Houston, told Anadolu Agency.

He stressed that if coronavirus-related quarantine measures around the world would continue into the summer, then oil storages will be full and producers would be forced to shut in production at wells.

"Brent is a net importing market, so it is possible that it could become filled with storage and some cargoes could trade below $20 per barrel," he said, adding "but that is more a function of the crude owners minimizing further losses from paying for storage than it is the price of crude per se."

About the duration of price of Brent crude trading below the $20 per barrel mark, Hirs said that would depend on how long the virus keeps the global economic engine shut down.

"Then, it will depend on how quickly the market can get back to business and work off the overhanging storage of oil," he explained.

- OPEC+ producers to be hurt

In order to mitigate the adverse impact of coronavirus on global oil demand, Saudi Arabia-led OPEC and Russia-spearheaded non-OPEC met in Vienna, Austria on March 6 to make deeper production cuts.

However, after the group dubbed as OPEC+ failed to reach an agreement, oil prices started plummeting. Prices declined further after Riyadh and Moscow announced the following week that they will increase their crude productions starting from April, which triggered a price war for larger market share.

Hirs said the current low price environment will hurt all OPEC+ members, as well as other oil producing countries that are not part of the group.

"Low prices will hurt the Saudis, but they have been prepared for this for a long time. Other members of OPEC will suffer disproportionately more, such as Iraq and the United Arab Emirates, in addition to Iran that is already hurting," he said.

Hirs said low oil prices hurt Russia the least, because Moscow can devalue the ruble and be internally self-sufficient internally, adding "Russia has turned inward, and it is a very resource rich nation, while the U.S. sanctions have held."

He said Norway, not a member of OPEC+ group, would probably be able to weather lower prices for an extended period time due to its prudent fiscal management.

- Oil at $10 a barrel 'not easily possible'

Dubai-based investment and strategy advice company Hormuz Straits Director Serkan Sahin said the only thing that can be currently foreseen in the oil market is the falling demand.

"There is a huge uncertainty due to the Covid-19," he said adding that although there is recovery in Asia, it does not have much impact on the global oil demand yet.

Sahin said that panic and fear from Covid-19 have forced countries to take strict measures, such as citizens staying at home, adding “This is lowering daily economic activity and negatively impacting the oil demand."

"The uncertainty of how long this process will last is the crucial point that will affect the markets," he noted.

Commenting on a scenario of oil prices hitting as low as $10 per barrel, Sahin stated that such a scenario is not easily possible.

"This scenario could happen only with a global economic downfall. If oil prices go lower to such levels, then we should expect to see shutdown of production facilities," he explained.

Sahin said decline in oil supplies around the world would have an adverse effect that would cause oil prices to go up because of concerns amid supply security

He also underlined the fact that countries heavily relying on revenues from oil sales and exports, such as Iraq, Columbia, Mexico, Venezuela, Kazakstan and Canada, will be hugely damaged by the low oil price environment.

- Prices to drop to 'next soft floor'

Paola Rodriguez-Masiu, a senior oil markets analyst at Norway-based Rystad Energy said the oil market should be prepared for prices to go down to the "next soft floor" about whether they would see $10 per barrel.

"Prices will have to drop to the next soft floor, that of short-run marginal cost for producing fields to trigger the necessary production shutdowns to bring balances to a sustainable stock builds levels," she explained.

She said Rystad energy estimates global oil demand dropping by 2.8 million barrels per day (bpd) in 2020, from the previous year, while global oil demand could drop as much as 6 million bpd in the second quarter of this year.

For the supply side, she noted that OPEC+ countries are also planning to bring more than 2.5 million bpd online starting from the month of April onwards.

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