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Price War During the Coronavirus Outbreak Hurting the Global Oil Market

The article describes the major causes of a drop in oil prices like a price war between Russia and Saudi Arabia, Coronavirus pandemic and their effect on the global oil market.

On 8th March 2020, oil prices witnessed a catastrophic fall that changed the entire ballgame for the global oil market. It all came crashing with the price war that ensued between Russia and Saudi Arabia resulting in the disbanding of the unofficial OPEC+ alliance of 2016. Oil prices slashed to its lowest in 30 years, crucially contributing to the stock market crash of 2020.

What brought it?

As the COVID-19 continued to claim more lives, entire nations were put under a complete lockdown. Inadvertently, the demand for transportation and factory output fell rapidly, creating a ripple effect in supporting markets; of which the hardest to hit was that of the global oil market. The biggest backlash came from a demand drop in China, which has been the largest importer of crude oil, after the coronavirus outbreak in Wuhan.†

A refusal to cut production in Russia has led to a massive surplus while demand continued to drop. This surplus production has created the question for storage. With more flowing in than going out, onshore tanks are rapidly filling up and will reach its threshold in only a few months.†

Many smaller producers that do not have access to major pipelines and ports, may overburden local storage in just a matter of days. Many refineries are now looking into offshore floating storage capacity, although even that could account for less than a week’s oversupply. The global tank capacity is seizing up and cutting production now may not be enough to keep it from being overhauled.††

How bad is the damage?

Major oil-dependent countries like Iraq, Iran, Libya, and Venezuela are feeling the most impact, yet others will not go untouched. As demand continues to fall while the surplus begins to surmount, some refineries are being forced to shut down.†

Multiple oil producers in North America have cut the drilling of new wells. The shale oil boom that brought with it an economic windfall for some states will hurt oil companies. The U.S. Energy Information Administration forecasts show that U.S. crude oil production will fall from 13.2 million BPD in May 2020 to 12.8 million BPD in December 2020 and would then fall to 12.7 million BPD in 2021.

In Iraq and Kuwait, oil producers announced price discounts to their buyers, though Iraq's discount was lower than that of Saudi Arabia's. The United Arab Emirates also announced an increase in production to 4 million barrels per day, higher than the country's estimated output capacity of 3.5 million BPD.

What does it mean for the customer?

The drop in prices could mean a much-needed relief to major importers of oil such as India, China, and Germany from decreasing energy bills. Additionally, creating a decline in gas prices may hike up demand for fuel in gas pumps as a direct result of increased supply.†

However, it may be too soon to celebrate as decreasing oil prices will not make up for the heavy strife caused to the economy.

According to the International Energy Administration, the†global oil demand is plummeting and may drop to 20 million barrels a day. This is the first time since the recession in 2009 that followed the global financial crisisBusiness Management Articles, there has been a decrease in demand. This has not only put the global oil market at risk but also threatens the global economy at large.

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†I†like having updates from different markets and analyzing the same. My market research background helps me know things better while discussing it with professionals.†

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