Marius Paun | London, UK | Senior dealer | Tuesday, 07th April 2020
What a month we have had for crude prices!
OPEC+, an alliance forged in 2016 between OPEC members and non-OPEC oil producers, led by Russia, had their meeting in Vienna on March 5. Officially they attempted not only to maintain the output cuts but also to increase them, to support crude prices. Coincidentally it was around the time when the coronavirus outbreak was declared a global pandemic, so one could have argued that demand destruction was underway. Maybe not surprisingly, the deal fell. As a result, Brent crude plunged from above $50 per barrel to mid $20s in two weeks.
Panic ensued. The pessimism also drove widespread talks about the oil price turning negative. There is so much crude coming to the market that storage space is now a real concern. Oil tankers are now being used for storage rather than transportation. The oil industry reported that ‘charter rates for tankers have more than trebled in the last month’. The negative oil prices story was also fuelled by the technicalities of the oil industry, it actually costs money to shut down an oil well and then restart it back up at a later date. So the producers might be better off if they keep pumping oil and pay buyers to take delivery.
The blame game was the next step. Russian President Vladimir Putin placed responsibility on Saudi Arabia pulling out of OPEC+. He added that Saudis increased production and even offered hefty discounts in order to ‘eliminate competitors who produce so-called shale oil’ (alluding to the US shale oil industry). However, Putin did say that his country was willing to make cuts.
Interestingly, Bloomberg reported that ‘Russian officials said privately they were seeking to do just that themselves, use lower oil prices to force US shale producers out and reverse some of the losses in market share they’d seen in recent years’. This seems to be becoming a distinct possibility as we’ve already seen the first US casualty, Whiting Petroleum, filing for bankruptcy. But some analysts have also drawn attention on the fact that some US shale oil producers have hedged their production at much higher prices and now they are actually benefitting from current low prices.
On the other hand, the Saudi Foreign minister has responded to the accusation, saying that Russia was the one who refused OPEC+ agreement in the first place, rejecting the 1.5 million barrels per day proposed cut. Prince Abdulaziz, the energy minister and half-brother of Crown Prince Mohamed bin Salman made the point that Russia was also the first to openly say that countries are now free to pump as much oil as possible. Funny or sad, oil market analysts have pointed to statistics. Saudi Arabia did shoulder most of the burden within OPEC+. They produced more than 2 million barrels a day below their capacity recently, while Russia had made a more nominal contribution.
Facing huge job losses for the US shale oil industry, which was one of the top employers in recent years, President Donald Trump unsurprisingly stepped in. He tweeted that he spoke to both countries’ leaders and expected ‘cuts of approximately 10 million barrels and may be substantially more’. It raised eyebrows as OPEC usually struggled to comply with low single digits cuts. Despite that, crude prices immediately jumped 25%. Overall last week, the prospect of a new deal spurred a 50% rebound in Brent crude prices.
However, those political attempts only focused on the supply side, decreasing the amount of crude hitting the market. If prices are to continue their rally back is also dependent on demand. It appears that because billions of people were forced to stay at home demand for gasoline, diesel and jet fuel collapsed by around 35 million barrels per day. Lifting the lockdown/ quarantine measures and letting people go back to work is very much linked to how temporary that demand destruction is.
Initially, the virtual meeting between Saudi Arabia and Russia to try to reach a new deal was scheduled for Monday, April 6. After appearing to be in favour, both countries have stepped back indicating they want other oil producers to join in. In particular, the Saudis insisted ‘a new agreement must involve significant contributions from outside the coalition, including the US and Canada’. Brent failed to build on a record gain last week, ending Monday session over 3% down at $33.05. Trump reacted and promised to impose tariffs on oil imports if Saudi Arabia and Russia fail to cut. The former OPEC+ members now plan to hold a virtual meeting on Thursday, April 9 instead.
The chart shows the overall trend is clearly down.
Nonetheless, the price has just moved above the moving averages which are now pointing upwards. The short-term MA is about to cross above the long-term MA which should be encouraging for the bulls. We can also see a gap down from low of 6th March at $45.23 to the high of 11th March at $40 which usually is covered at some point, sooner rather than later?
On the upside, bulls need to push the price above $35.33, the low of 10th of March, support turned resistance. If that is confirmed it could open the doors for the aforementioned gap to be covered. On the way down, bears will try to push the price below the first support at $32.33, the high of 17th March. Next target will be $30.7 followed by $28. Ultimately sellers will try to retest the recent low of $25.17 seen 1st April. If they are successful the long-term downtrend will resume.