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Saudi Arabia Using Coronavirus Shock to Send Oil to $20

The price of oil is not only about oil demand, which is rapidly deteriorating. It is also about oil supply.

Source: iStockphoto, Leonid Ikan

As I am writing this on Sunday, oil futures are down 20%, due to the inability of OPEC+ to reach a deal on oil price cuts last week, while demand for oil is falling sharply. While it is always unwise to assume, I would put incredibly high odds for crude oil to retest the January 2016 low of $26 in 2020.

The price of oil is not only about oil demand, which is rapidly deteriorating. It is also about oil supply.

Saudi Arabia seems determined to use the coronavirus shock to oil demand to hike output in what appears to be a calculated attempt to bring oil prices lower. It is well known that the Saudis wanted the price of oil to go down dramatically in 2014 and 2015, just as China was slowing down, in order to kill the U.S. shale boom. It would appear they are trying the same move again. (For more on this, see the March 7, 2020, Bloomberg article, “Saudis plan big oil output hike, beginning all-out price war.”)

Over the weekend, Saudi Arabia slashed the price for crude oil exports by the most in at least 20 years, offering unprecedented discounts at the expense of other suppliers. If this is also coordinated with a big production boost going to a record of 12 million barrels a day, prices will fall dramatically from here. That would be roughly a 20% boost in Saudi exports from present levels at a time when demand is falling rather sharply. That makes $26 a likely target for the price of crude oil – where it settled in January 2016.

The Saudis don’t like the U.S. shale boom, as it marginalizes them as a key player in global markets. They also have a very low cost of producing oil, which by some estimates is $3 a barrel, while shale oil can cost $30, $40, $50 a barrel, or even higher. The thing about shale oil is that every field has different costs, but all shale oil is much more expensive than conventional oil, which causes the Saudis to use their cost advantage as a weapon in world markets, as they are doing in this case.

It is conceivable that crude oil can break $20 if global demand keeps getting affected by the coronavirus and the Saudis keep pumping and exporting oil. Oil did not stay under $30 for long in early 2016, so in this regard it did not “break” the U.S. shale boom. But what if crude oil stays in the 20s longer this time?

The key to the crude oil forecast becomes the coronavirus as it is unknowable how fast it will be contained. If it follows the normal flu seasonal pattern like SARS in 2003, new cases globally should be on the decline within one to two months. Then the coronavirus will no longer be helping the Saudis and they very well may fail again in their plan to break the U.S. shale boom.


Equities Contributor: Ivan Martchev

Source: Equities News

The astronomer Carl Sagan said, “It was easy to predict mass car ownership but hard to predict Walmart.”