From trading around $69 per barrel in January 2020 to falling to a low of around $33 per barrel mark this week — oil prices have definitely witnessed a turnaround in the past two months. What is happening and why such a sharp dip?
The price war
Saudi Arabia instigated an oil price war with Russia as it announced that it would slash its selling price for oil and also plans to boost its production to record highs of 12.3 million barrels per day (mbpd) in April.
Why this?
The Organization of the Petroleum Exporting Countries (OPEC) and Russia failed to reach an agreement on production cuts to support the oil prices amid coronavirus outbreak. Moscow refused to support the pact after which Saudi Arabia decided to go ahead with the price cut and increased production on its own.
The dip in prices
The Brent crude oil prices plunged to a 20-year low by falling below $33 per barrel mark on Monday post the news. The commodity was trading around $69 per barrel in January, falling over 50% in two months. Below is the chart that shows the Brent Crude Oil (IEC) movement in the past six months.
The WTI Crude (Nymex) has also slipped from the level of $63 per barrel in start of the year to hovering around $31 per barrel level this week.
Saudi’s capacity
The United States of America, Russia, and Saudi Arabia top the list of oil-producing countries globally. Therefore, the oil actions taken by Saudi Arabia are very much important as its impact is wide.
As per OPEC’s monthly oil market report, Saudi Arabia’s crude oil production in February 2020 decreased to 9,683 tb/d (thousand barrels per day) from 9,739 tb/d in January 2020. Do note that Saudi produces the most oil under the OPEC list.
Glancing to a global figure for February, preliminary data indicated that global oil supply decreased in February by 0.29 mb/d month-on-month (MoM) to average 99.75 mb/d, as per the OPEC monthly report.
Oil companies’ impact
Big oil companies shares like UK’s British Petroleum (BP) and Netherlands’ Shell have seen a huge sell-off post the price war escalation.
However, a fall in crude prices is a boost for the Indian oil marketing companies (OMCs) like Indian Oil, Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) as they can purchase oil in lower prices when the global oil prices plunge.
Reports suggested that BPCL and Reliance Industries have bought extra Saudi Oil for April loading. Looks like the companies are trying to take advantage of the sharp price fall situation and maintain their inventory.
On the other hand, fuel prices have also been cut across major cities in India in the past few days given the fall in crude prices.
Even though India is considered to be among the significant gainers from the oil prices slump, it is definitely not the cheery time for the economy. The fall in oil prices and coronavirus pandemic have shaken the equities and economy pushing the U.S. and Indian stock markets to bear territory.
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