On Friday, global energy markets entered uncharted territory. Already facing declining demand due to the impact of COVID-19, markets then were dealt a body blow with the collapse of the OPEC-Plus alliance and the resulting prospect of a significant increase in supply. Saudi Arabia wanted to manage supply to balance against lower demand, but Russia was having none of it. Instead, reports from the OPEC-Plus meeting indicate that Vladimir Putin has declared war on U.S. shale. Then on Saturday, the plot thickened. Saudi Arabia made huge cuts in the price of its crude oil, presumably in a high-stakes move to bring Russia back to the negotiating table. Even though we are witnessing unprecedented market conditions, it’s not Armageddon. Crude oil will continue to be pumped, piped, shipped and refined. Most infrastructure projects under construction before the collapse in oil prices will be completed. The big question is, how will the market adapt? In today’s blog, we’ll begin an exploration of that question.
Events are moving fast these days. Last week in Free Fallin', we considered the impact of a collapse in the crude oil market that brought WTI Cushing for April delivery down to $44.76/bbl, with natural gas and NGL prices also coming down hard. Energy prices were already under pressure from continued record production levels from U.S. shale, weakening demand, a mostly mild winter and a general investor pall over all things carbon. At that point, the threat of a global coronavirus pandemic was enough to take the market to the edge of the abyss. What could be worse? About the only thing would be a meltdown of OPEC-Plus at its early-March meeting in Vienna. Which is just what we got. And now we are plunging into the abyss. WTI collapsed to the low $30s/bbl in weekend trading. Perhaps this really is Armageddon.
The left graph in Figure 1 shows what the abyss looked like on Friday for Brent (army-green line) and WTI Cushing (blue line). Since January 2, prices for both were off by about one-third, down ~$21/bbl and ~$20/bbl, respectively. As indicated in the dashed red oval, crude prices were hit hard during the last week of February, but then gradually crept higher early last week — until the end of the week as the OPEC-Plus news started to leak out, and then became official on Friday. Various pundits started to predict that the price plunge would continue, headed down to levels not seen since the depths of the late-2015/early-2016 price crash. And that looks like where we are headed. So looking back to that last dire period for oil markets, what happened back then?
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