Oil prices shed to a two-decade low since Russia and Saudi Arabia failed to reach a production cut deal in March. The unprecedented decline in demand due to the global outbreak of coronavirus (COVID-19) too hit the sentiments of oil.
The global benchmark US WTI crude plummeted to $19.27 a barrel last week, its lowest level since 2002. A similar trend was seen in Asian Brent and the Indian futures prices as well.
The OPEC de facto leaders, Saudi Arabia and Russia plan to drastically cut production as the virus outbreak further erodes demand amid supply glut. However Saudi Arabia failed to convince Russia to agree on deeper production cuts which unleashed a price war between the countries. Global oil markets are presently highly oversupplied with about 20 million barrels a day.
The historic slump in oil prices are now threatening the higher cost drillers in the United States and around the globe. Currently, the US is the world’s largest oil producer supported by technology driven shale oil exploration but the present global oil price is far below the production cost of many US-based oil drillers.
Now the US is trying to get the world to cut output by 10 million barrels per day to prop up prices. They are also pressing Saudi Arabia to dial back its plan of cutting oil price after the market-share war with Russia.
Oil prices have been under pressure ever since the US-China trade war started. The trade spat between the world’s top two economies hit global growth forecast and the demand for oil. A drop in vehicle sale and a slump in the automobile industry due to higher tariffs and prolonged uncertainty about trade policies hit the global oil demand.
The clampdown in travel and national lockdown in many countries to fight against COVID-19 virus further hit the need of oil. Industry experts expect oil demand could slump by 15 to 20 million bpd in the next few weeks due to change in demand supply dynamics.
The ongoing health crisis could cause a global recession. The negative economic impact of the virus is expected to be much more damaging to the global economy. This may lead to weaker oil demand than during the 2008-09 financial crisis.
As more and more oil and oil products are being churned out, more than the global consumption, oil stockpiles are also filling up fast putting additional pressure on prices. As per forecast there are about 750 million barrels crude in storage globally.
According to some reports, oil producing countries are struggling to find buyers for millions of barrels as many industrial users and refiners have cut operations as the virus destroyed demand.
Looking ahead, prices are likely to continue with negative bias, despite policymakers committing trillions of dollars to offset the negative impact on the economy. Recent price recoveries might be short lived as economic activities in most of the countries has been halted owing to the deadly pandemic. Also, due to fears of losing market share Saudi Arabia and Russia may not give up their price battle which may flood the global crude market further.
On the technical side, if NYMEX prices break the recent swing support of $19, the momentum may continue towards $16 followed by $11 a barrel. Conversely, a close above $33 can take prices higher but unlikely to break the strong upside obstacle of $44 a barrel.
The author is Head of Commodity Research at Geojit Financial Services.
Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
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