Energy Sources

The coronavirus effect?: The beginning of an oil war

The novel coronavirus officially called COVID-19 is already wreaking havoc in the economy worldwide.

China, where the virus originated, is the top manufacturing country in the world and the second largest energy consumer. Since the epidemic started at the end of 2019, factories in China have temporarily closed which obviously translates into a decrease in energy consumption.

China was just the beginning. As COVID-19 keeps spreading around the globe like wildfires, a global decrease in energy consumption is imminent.

The oil industry is feeling the consequences of COVID-19 with plummeting prices. The spreading of the virus has decreased oil demand to the point where prices crashed to their lowest level in 4 years. The decrease in oil demand is driven by airlines cancelling flights, schools and offices closing, more people staying at home and working from there. Most of the decline in demand can be traced back to China where, according to IHS Markit, the coronavirus has caused an “unprecedented stoppage”.

The OPEC, whose role is to unify petroleum policies among its members, was under pressure to act and try to halt plunging oil prices amid the novel coronavirus epidemic. The OPEC presented a plan to cut production hoping to reach an agreement with longstanding allies like Russia in a meeting held in Vienna on March 6th. The plan proposed by the OPEC was “to extend existing production cuts of 2.1 million barrels through to the end of 2020; and make further cuts of 1.5 million barrels per day”. However, an agreement was not reached.

Russia’s decision to not follow the plan started an oil price war. Probably the ugliest in recent history. Early morning March 9th, Saudi Arabia cut its official prices by the most in 20 years and is reportedly getting ready to ramp up production. This move caused prices to dramatically fall by 31% in seconds as the Asian market opened after the weekend. It is the steepest drop in price since the U.S. war in Iraq in 1991.

The possibility of another price war is scaring traders leading to speculation that prices will continue falling to a price as low as $20 per barrel within a year. The future is uncertain, and news are developing rapidly. Stay tuned.

Sources:

CNN, Oil Price, Bloomberg

Featured image: Photo by Zbynek Burival on Unsplash

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