How coronavirus influences oil industry
Overview
For a few months, the whole world is suffering from a new type of virus COVID-19. Since January, the spread of coronavirus has caused the collapse in global stock markets. They reversed nearly all the positive dynamics in oil prices over the past four months. As the COVID-19 starts spreading outside Asia, the oil market will continue to feel the draught.
The most critical questions that worry all people are how deep and for how long?
Basically, the coronavirus influences the oil industry in two different ways. Firstly, severe restrictions on traveling constrain the use of jet fuel. Therefore supply chains slow down. The industrial activity begins to decline. Companies send their workers home, that’s why less oil and oil products are used and produced. These all processes directly affect oil consumption. Companies began to receive information on oil demand calculations.
Secondly, the effect of the coronavirus on the global economy, in the stock market’s view, creates a projection of global oil demand over the long-term. As the broader market thinks that the health of the global economy declines, it is expected that oil prices will further fall.
Here is a graph that shows a change in oil prices between 2010 and 2020.
It was initially suggested that the virus would primarily reduce Chinese oil demand and broader jet fuel consumption. As we see now, it influences much more significant global economic growth. According to Barclays, in late January projecting that oil consumption would decline by approximately 600?800,000 barrels per day (bpd) over Quarter 1 and by 200,000 bpd over the entire year has been eclipsed by the International Energy Agency’s (IEA) downward revision of annual oil demand growth by 365,000 bpd.
Big collapse in oil prices, March 9 2020
Global oil prices crashed early on March 9. This happened after two of the world’s most important oil producers were not able to reach a consensus on how to respond to the potential effects of the COVID-19 outbreak.
A meeting between the Organization of the Petroleum Exporting Countries (OPEC) and ten other oil-producing countries (known as OPEC+) ended on March 6. Saudi Arabia failed to convince Russia to accept more than 1 million barrels per day (bpd) cut in production to compensate for the fall in demand too, because of the economic activity slowing during the coronavirus emergency.
In response to Russia’s refusal, the capital of Saudi Arabia Riyadh cut its official selling price for April down to $8, from a previous $14. Moreover, it is going to raise its production levels, rather than cut. Both countries are that they will be able to survive a temporary period of low oil prices. Their economic positions are directly dependent on the export of oil products. As an example, Brent crude oil had fallen to nearly $31 on March 9. International financial markets keep falling because of concerns about the continued drop in oil prices as well as the general precarious situation in the oil industry.