(Zeyan Wen & Aidan Miao)
Covid-19 pandemic and its impact on oil prices
As the pandemic started to spread in China in January and was at its worst in February, people stayed home, factories and airports were closed, domestic and international travels were cancelled altogether. As the world’s biggest importer of oil, China alone can contribute to a big portion of the decrease in oil demand. As the pandemic started to spread around the world in March, the world’s oil demand plummeted as countries went into lockdown.
In the response to the decrease of oil demand, OPEC recommended production cuts of 1.5 million bpd starting in April and extending until the end of the year, but Russia rejected the production cuts and these countries failed to reach an agreement. As a result, oil prices plummeted in early March as Saudi announced that it would increase production to 12.3 million bpd in April, nearly 2 million bpd more than the estimate in March, setting off the price war with Russia. The kingdom pumps 9.7 million bpd in March but had the capacity to produce 12.5 million bpd. Russia and UAE indicated that they could also increase production output, other countries that have the capacity to pump more oil will likely do so, too. This dropped the WTI oil prices by 24.59% to settle at $31.13 per barrel, and Brent crude dropped by 24.1% to settle at 34.36 per barrel on 9th March, which was the biggest one-day percent drop in oil prices since 1991. (CNBC)
(graph from CNBC)
A month later in April, under the pressure from US President Trump, fearing the US would suffer more job losses in the US due to this price war, OPEC+ countries agreed on the largest oil production cut in history. The deal promised a cut of 10 million bpd in May and June, Saudi and Russia both agreed to take output down to 8.5 million bpd, and all the members will cut supply by 23%, resulting in almost a tenth of world’s oil supply removed (worldoil.com). However, despite OPEC+ reached an agreement, the oversupply would be unavoidable, and it does not seem like there is an effective way to limit the surplus of oil. According to World Oil, secretary-general of OPEC, Mohammad Barkindo, estimated the surplus of oil to be at 14.7 million bpd in the second quarter. OPEC is seeking cuts from the G20 countries, too, on top of the planned 10 million bpd reduction.
So far most countries have been complying with the agreement, other than Iraq, and although Russian industries are struggling with the oil cut, the Russian energy minister said in an interview that “the level of compliance with the deal will be 100 percent” (NYT). In June, OPEC and Russia met again to extend production cuts, and to make sure member countries are complying with the agreement (EnergyWorld). Despite difficulties with certain countries not complying with the cuts, we can safely predict that the overall oil production will be greatly reduced, although there will still be a great surplus at the end.
Then came late April, oil prices went negative on WTI as the price of a barrel of oil fell to minus $37.63. This result came about due to the oil storages around the world started to pile up and are at their capacity. The oil producers were paying buyers to take away their commodity because storage capacity is running out and demand is drying up.
Now we are slowly approaching the middle of all this pandemic and many countries can start to expect life to go back to normal and plan out what to do next. China’s economy has slowly reopened after there is no new cases since early April other than a few small outbreaks, and the factories and domestic travels are slowly catching up. Even though right now foreign demand is still low for Chinese manufacturers, and Chinese consumers are slow on buying and spending money, it will inevitably happen that oil demand will rise.
China became the top oil importer in 2019 and imports on average 10 million barrels per day in 2019. It has the highest demand for crude oil and is the biggest consumer. The reopening of Chinese economy is good news for the oil industry, but it does not directly translate into a rise of demand, as there are still leftovers of oil from the period of late February and March. The situation must depend on how the world will handle the pandemic. US and some European countries are slowly opening their economy too, as new cases are easing down. If all goes well, we can cautiously expect that the demand will go up by summer. However, we must be aware of the risk that there is also a chance that world oil storage would eventually overflow and the oil prices might go negative again.
CNBC report on the price war:
NYT on China reopening the economy:
CNBC on the first oil price drop:
oil prices then went negative as storage is filling up and at their capacity:
Russia and Saudi agreed on a production cut:
Russia and oil cut:
Russia and OPEC to extend the oil cuts (and pushing for compliance): (energyworld)
China’s oil import: