The price of Brent crude oil stood at around $25 a barrel and US crude fell below $20 a barrel on Monday as the impacts of the crisis over the Covid-19 virus continued to affect international markets. In a sharp downgrade from its predictions on oil demand as recently as last February, the International Energy Agency's (IEA) March report predicted that global demand would be 99.9 million barrels a day in 2020, signalling a decrease of 90,000 barrels a day compared to 2019. The IEA has thus downgraded its predictions, with its March report seeing a further decline in prices due to contraction of demand for oil in China, the world's largest consumer, coupled with the stoppage of aviation and reduction of economic activities on the global level. It has also produced scenarios regarding the outlook for the oil market in 2020. A low-case scenario sees global demand falling by 730,00 barrels a day if the coronavirus pandemic is not contained. A more optimistic scenario sees global demand growing by 480,00 barrels a day if the virus is contained on the global level. Meanwhile, the financial news agency Bloomberg reported that IEA Executive Director Fatih Birol had said in a press briefing on 26 March that oil demand could fall by about 20 million barrels per day. The storage of crude oil is a potentially growing problem, with dislocations expected to happen “as soon as producers start running out of room to store crude”, Edward Moya, a senior market analyst at the forex trading and broker the US Oanda Corporation, told the oil news website Oil.com. The continuous stockpiling of the commodity is also expected to push the price to as low as $10 per barrel. The falling demand for oil has adversely impacted the revenues of oil-producing countries at a critical time as they strive to draw up emergency budgets to support their economies that have been hard-hit by the coronavirus pandemic. The US investment bank JP Morgan said that an approximate $100 to $150 billion in stocks had been offloaded by sovereign wealth funds in oil-producing countries. The situation is negatively impacting all oil-producers, from sanction-embattled Iran to US shale-producers hit by declining demand, bringing about a historically unprecedented crash in prices that will potentially induce an unprecedented curtailing of crude-oil production threatening the US oil industry. Following the US Congress passing a $2 trillion stimulus package to boost the US economy last week, the US Department of Energy withdrew its plan to buy 77 million barrels of oil for the US Strategic Petroleum Reserve (SPR) after funding for the plan was removed from the stimulus package. As the demand for oil falls as a result of the slowing-down of world economies, the market's efforts to stabilise prices have also been beleaguered by the continuing tug-of-war between Saudi Arabia and Russia over production cuts. The stand-off between the two major oil producers started when a 6 March meeting of OPEC+ (OPEC's 14 member-states and Russia, the world's third-largest oil producer) failed to reach an agreement on production cuts proposed by Saudi Arabia, with Russia rejecting the proposals. Saudi Arabia had proposed a production cut to the tune of 1.5 million barrels per day until the end of June, over and above cuts already implemented by OPEC to stabilise market prices which had fallen by almost 50 per cent in January. In response to Russia's refusal to approve its proposed cuts, and in a bid to demonstrate its ability to control the market, Saudi Arabia then announced a price cut, with the Saudi ARAMCO oil company announcing an increase in its production from 12 to 13 million barrels a day, causing prices to fall by 25 per cent. The US Trump administration has attempted to intervene in the standoff between Saudi Arabia and Russia, pressed by US oil companies as well as by Congress to do so. US Secretary of State Mike Pompeo had called on Saudi Arabia to start to stabilise market prices ahead of the G20 group meeting that was held on 26 March. But any negotiations on this front, regardless of outcome, will have little bearing on the downward turn in production and prices. According to the IEA, the short-term outlook for the oil market will ultimately depend on how quickly governments move to contain the coronavirus outbreak, how successful their efforts are, and what lingering impact the global health crisis has on economic activity. The future of the oil market at this point thus seems precarious, with the International Monetary Fund (IMF) estimating that in 2020 Saudi Arabian oil will need to be priced at $78.3 per barrel and Russian at $40 in order to balance the countries' budgets.
*A version of this article appears in print in the 2 April, 2020 edition of Al-Ahram Weekly
