The Oil Problem
Updated: Jun 7, 2020
Will Oil prices recover or we will see further declines?
The 1st Plunge
First, let me begin with the very reason that Oil prices started to decline. Basically, Saudi Arabia during a weekend took a hostile decision to increase production to maximum capacity pumping more Oil than ever. This eventually led Russia to pump more Oil as well (marking a start of Oil price war - market share war).
With the market having its own views and expectations, Oil prices plunged by more than 30% when markets opened after the weekend pricing in Russia's expected Oil increase.
The good thing at that time is that investors expected US interference to resolve the dispute between the two countries that led Oil prices higher by around 8%.
But the black swan of todays world was watching closely to sweep the globe and disrupt everything.
The 2nd plunge - The Pandemic
Upon the declaration of COVID-19 a world pandemic and the virus spreading to developed countries disruptions began to surface as governments locked down measures crippled trade, spending and consumption leading to lower economic activity.
Oil demand, as a result, declined significantly to approximately 70 million barrels per day. With supply at all time highs, prices plunged to lows not seen since the 90's were Crude Oil prices now trading below the psychological level $20 per barrel.
Looming US political pressure in efforts to save the US Energy Sector, OPEC and OPEC+ producers met to discuss production cuts and agreed to make scheduled cuts starting with almost 10 million barrels per day for two month beginning May and declining to almost 8 million barrels per day till the end of 2020 attempting to limit supply and ease demand weakness with further cuts in 2021 and 2022.
But all efforts failed to pick up prices as demand and supply concerns exceed optimism from production cuts. Simply, the cuts are not material to lost demand and to the new world dynamics post COVID-19 and its implications the economy and consumer behavior.
Oil prices haven't see a bottom yet and the problem is not over as our tiny micro omen is active.