Oil War Shifts to Price Slashing as Crude Demand Plummets

Oil industry's 'Black April' as US rig count falls
April 17, 2020 Updated: April 17, 2020

The International Energy Agency (IEA) said this week that global oil demand will fall by the highest amount ever in 2020 due to the economic lockdowns and inactivity forced by international measures to contain the CCP (Chinese Communist Party) virus, commonly known as the novel coronavirus.

The IEA’s Oil Market Report for April states that global oil demand will likely fall by 9.3 million barrels per day (mmbd) in 2020 compared to the year before. The market in April and May will be particularly hard hit with demand down 29 and 26 mmbd, respectively. However, deliveries are expected to recover slowly after that—depending on how quickly economies can reopen.

Worryingly for the industry, the IEA also projects that collapsing demand across global markets will mean that despite recent cuts in production by the OPEC+ bloc of oil producers, second-quarter oil inventories could build at a “massive” rate of some 17.4 mmbd, putting enormous pressure on tank farm and Strategic Petroleum Reserve capacities.

“We may see it was the worst year in the history of global oil markets,” said IEA Executive Director, Fatih Birol, who called on all oil-producing nations to take measures to “flatten the curve of the stock build-up.”

Meanwhile, the U.S. Energy Information Administration (EIA) confirmed that crude stocks in the United States had built at a rate of 19 mmbd in the last week.

OPEC Cuts Demand Forecasts

In its April report released this week, the Vienna, Austria-based Organization of the Petroleum Exporting Countries (OPEC) was somewhat more optimistic than the IEA, but still expects a fall in global demand of 6.9 mmbd in 2020. OPEC stated that it believes the U.S. economy will “contract by 4.1 percent in 2020, following growth of 2.3 percent in 2019.” The organization expects an even greater economic decline of 6 percent across the Eurozone countries.

OPEC said that the “Benchmark oil prices plunge prompted companies to respond by cutting capital expenditure to the lowest in 13 years,” while the cartel expects that oil supply will only grow in Norway, Brazil, Guyana, and Australia this year.

Crude prices have fallen over 60 percent this year due to a price war between Saudi Arabia and Russia and the economic fallout from the CCP virus crisis. Spot prices for benchmark West Texas Intermediate (WTI)—a light, sweet crude favored by refiners on the U.S. Gulf Coast—reached a low of $14.10 on March 30, before recovering to end trading at $19.87 on Thursday. WTI had been trading around the $61 mark at the beginning of January.

Saudi Price Discounts

According to a Bloomberg report, Saudi Arabia slashed its crude prices in the wake of the OPEC+ agreement to cut production by over 9 mmbd last week. Saudi Aramco offered reduced prices to customers in the Mediterranean and the lucrative Asian market, though prices to the United States and Europe increased slightly.

In discounting its official crude prices in Asia while allowing prices to increase in North America and Europe—traditionally Russia’s backyard in terms of crude sales—Saudi Arabia may have been moving to dampen Aramco crude sales in the main markets of American and Russian producers, thus placating both President Putin and President Donald Trump, who helped broker the OPEC+ deal.

Saudi Aramco cut already discounted prices of its Arab Light crude by $4.20 a barrel for Asian customers this week, with discounts of up to $5.50 for some types of crude. In contrast, Saudi prices for U.S. customers increased by between $2.50 and $4.20 per barrel, with prices for deliveries to Europe set for a more modest increase.

US Rig Counts Plummet

Energy market analysts Rystad Energy said in a recent report that the number of oil and gas rigs across the United States is in freefall.

“From a long-term perspective, the pace of the rig decline in this down cycle keeps beating historical records,” according to the company. “The two-week decline pace reached almost 19 percent as of the last week, easily outperforming the previous two-week decline records of 14 percent and 11 percent achieved in 2015–2016. The horizontal oil rig count in the whole U.S. Land is already down by 26 percent from the peak level on 13 March 2020, four weeks ago.”