During these unprecedented times of coronavirus pandemic where many countries are restricting people’s movement due to lockdown and global oil storage is reaching its limits, the oil prices reached a level not seen in 2 decades of the 21st century.
The drastic fall in oil prices has been caused by falling oil demand across the world where social distancing norms, travel restrictions, and lockdowns have led to a drastic fall in oil consumption.
US benchmark, West Texas Intermediate, has dropped to the $11 range as global economies remain on lockdown due to the COVID-19 pandemic, smashing crude demand.
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To add insult to injury, global oil storage is also approaching its limits. The situation is so desperate, in fact, that the Department of Energy is even considering paying domestic oil producers to keep crude in the ground.
On this Wednesday, the International Energy Agency had reported a record 19 million barrel increase in domestic crude oil supplies.
“Too much oil, with nowhere to put it,” said Kit Juckes, a senior strategist at Société Générale in London, noting that “oil-sensitive currencies are under pressure again”
Not even OPEC has been able to provide any comfort to the weak oil industry. While the cartel and its global partners were able to agree upon a 9.7 million barrel per day cut, the market clearly thinks it’s not enough.
Most importantly, as you can see the in the graph below the fall in oil prices have even exceeded the global Financial crisis of 2007–08
OPEC supply cuts like a drop in the ocean
Vandana Hari, the founder of Vanda Insights, a firm specializing in oil market analysis, stated, “The current prices show that the OPEC+ cuts proved to be a blip, with oil prices at the mercy of the virus once again,” adding that “Until we approach a lifting of the lockdowns in the US, the oil may drift lower or remain rangebound around current levels.”
The oil price downfall is sending shockwaves throughout the entire industry, with oil majors slashing spending across the board, and explorers cutting as much as 13 percent of their drilling fleet as the crisis continues.
The troubling times have even pushed the Texas Railroad Commission to consider the unimaginable, mandate a state-wide production cut. While the three commissioners were unable to come to a decision last Tuesday, the group is set to meet again on April 21st.
And with oil prices having fallen an addition 20 percent since their last meeting, they might just be ready to take action.
Even if the RRC follows through with their plan to interfere with the free markets, however, many experts infer that as much as 20-30 million barrels per day in demand is being decimated by COVID-19 — causing a much more severe impact to negate the cuts by global oil producers so far.