Fri. Oct 30th, 2020

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GLOBAL OIL CRISIS

2 min read
CRUDE OIL

Oil prices have been weak for all of 2020. In part because of the energy revolution in the US,and in part to slow global growth. It is a problem the entire world is facing since late 2014. Since late 2016, there was a strategy executed by OPEC members and other key oil producers like Russia, and Mexico. The COVID-19 crisis has disrupted Chinese economic activities and with it the global supply chains in demand for transport fuel. The 2016 strategy implemented by OPEC+ to cut production has fallen apart. Therefore, we got way to much oil in the market which the Saudis are selling in discounts. It is an oil flood. We are seeing free market movement but it is weaponized by the Saudis, though, the latter completely disagrees to it. The Saudis are trying to start over cell production ad take market share from Russia. While hoping the Chinese economy will pick up soon and COVID-19 does not put the global economy into recession.

The good news is, we have plenty of oil, but the bad news is, we need the global economy, specially the Chinese economy to pick up demand.

The price of oil has actually slipped into the negative territory where the suppliers are literally going to be paying buyers to take delivery of a barrel of oil. Under normal market condition, we all know that oil is an asset or something that has value. If you are selling somebody contracts to purchase oil at a future date, they will sell it for a positive amount as oil can be refined and used for multiple different used cases. Based on the current level of demand which has an unprecedented load, which has never been seen before, there is such an oversupply of oil that is threatening to further whipsaw the market and drive prices even lower. As a result, oil prices went into negative territory where oil no longer has value.

Global LNG spot prices have plunged to all time lows, as markets grapple with demand destruction due to the coronavirus pandemic. Platts JKM, the benchmark price for spot LNG in Northeast Asia, has fallen below $2/MMBtu, shedding more than 65% since the beginning of the 2020.

Platts Analytics expects the JKM to remain below $2.6-/MMBtu through October on limited appetite from the world’s biggest consumers- Japan, China, South Korea, Taiwan and India. With little demand support on the horizon, LNG supply curtailments are as the only way to help rebalance global demand and supply.

US LNG exporters have been particularly hit by cargo cancellations because shale economics and greater offtake flexibilities.

Australia’s pre FID projects and contracted LNG volumes are also vulnerable to price uncertainty, given the high cost of its gas supplies and LNG infrastructure.

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