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Unlocked PC Premium Content: Oil price decline overview An overview of the Saudi Arabia-Russia price dispute, US and OPEC+ responses, the WTI oil price collapse, and the impact of COVID-19 on the oil and gas sector May 27, 2020 Producers August Gebhard-Koenigstein and Zachary Goldstein
COVID-19 contributed to major oil-market disruptions
The outbreak of coronavirus led to a collapse in oil demand; differences in opinion over
how to approach depressed demand led to the disintegration of a long-standing
production cooperation agreement between Russia and Saudi Arabia
Background information Cause of the oil war Impact and response
• Russia is not a member of the • In an OPEC meeting a week prior to • The stock market had its worst day
Organization of Petroleum the open hostilities between the two since 2008; stock indexes plunged
Exporting Countries (OPEC) but nations, Saudi Arabia proposed a so rapidly that trading had to be
had a deal to collaborate with cut in oil production of 1.5 temporarily halted
OPEC, known as OPEC+ million barrels per day to • Congress considered including,
• The Russians and Saudis had up offset falling demand due to but ultimately excluded,
until recently been in an important COVID-19; this would prevent the purchasing up to 77 million barrels
alliance meant to counter the price of oil from falling further of oil for the Strategic Petroleum
impact of the US shale boom • Russia refused, reportedly hoping Reserve in its COVID-19 phase 3
• However, the American oil industry to flood the market in order to drive stimulus package
has remained competitive, and prices down and damage US oil • In April 2020, OPEC+ reached a
Russia and Saudi Arabia have producers deal to cut production of oil by 9.7
become reliant on selling • Saudi Arabia responded to Russia’s million barrels each day
cheap oil to China, which needed refusal by going further than Russia
access to low-price crude oil during and driving prices even lower than
its 2015-2016 mini-recession Russia was willing to go
Sources: Vox, The New York Times, NPR, The Guardian, MarketWatch, AgWeb, The Hill, Axios.
August Gebhard-Koenigstein | Slide last updated: May 26, 2020 2Crude oil prices declined substantially in March due to falling
demand and the Saudi Arabia-Russia price dispute
Brent crude oil closing price in US dollars, 3/2/2020 - 5/25/2020 Details of the
OPEC+ oil
$60.00 production deal
5/11/20: Saudi Arabia
$50.00 announces it will cut June
3/31/20: Pres. Trump production by an additional one • OPEC+ members, including
speaks with Saudi Arabian million barrels per day; UAE and Saudi Arabia and Russia, agree to
$40.00 crown prince about oil Kuwait follow with additional cuts cut production by 9.7 million
dispute barrels each day in May and
June
$30.00 • The United States expects its
oil production to decline over
time, due in part to voluntary
$20.00
cuts by industry
3/13/20: Trading sources 4/12/20: OPEC+ members
report that Saudi Arabia • Mexico agrees to cut production
$10.00 including Russia and Saudi
will flood the petroleum Arabia announce for two months by 100,000
market with cheap oil production agreement barrels each day, fewer than
the 400,000 initially requested
$0.00
by OPEC+
Trump administration responses to declining oil prices
Fed expanded the The DOE plans to
BLM has allowed
White House worked emergency lending buy one million
companies to apply
with OPEC+ to reach program, opening a barrels of oil from
for lease suspensions
a deal cutting oil pathway for oil producers US companies for
and avoid royalty
production to receive federal funds the Strategic
payments
Petroleum Reserve
Sources: Markets Insider, Reuters, The New York Times, The Hill, Politico, Axios, CNBC, CNN Business, MarketWatch, High Country News.
Zachary Goldstein | Slide last updated: May 26, 2020 3On April 20, 2020, one oil price index dipped into negative
territory due to falling demand and insufficient storage
West Texas Intermediate (WTI) oil price index in US dollars, 3/2/2020 - 5/4/2020
$60.00
$50.00
$40.00
$30.00
$18.27
$20.00
$10.00
Oil price collapse overview $10.01
$0.00 • On Monday, April 20, 2020, the WTI oil price index fell below
zero, meaning that in some cases companies were paying for
-$10.00 others to take oil contracts off their hands
• Producers have not cut oil supply at levels proportional to demand
-$20.00 decreases, leading to an oil glut
• There is insufficient space to store oil due to finite tank capacity
-$30.00 • May contracts needed to be settled by April 21, so traders
rushed to offload their oil contracts
-$40.00
-$37.63
-$50.00
Sources: Markets Insider, The New York Times.
Zachary Goldstein | Slide last updated: May 27, 2020 4Some investors fear that oil stocks are approaching global
storage capacity
Crude oil working storage capacity and net stocks, US total and by region
IN THOUSANDS OF BARRELS, AS OF MAY 15, 2020
■ Net stocks (oil held at tank farms and refineries) ■ Working storage capacity
700,000
600,000 Net stocks in
Cushing, Oklahoma
were at 72% of
500,000 working storage
capacity as of May
400,000 15, 2020
300,000
200,000
100,000
0
Sources: US Energy Information Administration, CNBC.
Zachary Goldstein | Slide last updated: May 27, 2020 5Consumers may not reap the full benefits of the decline in US
gasoline prices
Weekly price of regular conventional retail gasoline in the
US, in dollars per gallon Gasoline prices fell due to restrictions
on travel and the Saudi Arabia-Russia oil
FEBRUARY 24-MAY 25, 2020
price dispute
$2.37
$2.32
$2.27
$2.14 Consumers are largely limiting travel as a
$2.01 result of COVID-19 and are thus less
$1.89 $1.87 likely to reap the benefits of lower
$1.80
$1.74 $1.75 $1.78 gasoline prices
$1.69
$1.66 $1.68
Due to fall-offs in gasoline demand, EPA
extended sales of winter gasoline,
which is more likely to cause smog in
summer heats
USDA did not include ethanol in the
list of farm sectors receiving COVID-19
stimulus funds from the agency; the
industry could see assistance in future
response legislation
The electric vehicle industry could
suffer from lower gasoline prices and
disruptions to lithium-ion battery supply
chains
Sources: US Energy Information Administration, USA Today, MIT Technology Review, The Hill, Politico, DTN Progressive Farmer.
Zachary Goldstein | Slide last updated: May 27, 2020 6You can also read
