The decision earlier in the month by Russia not to reduce production and the subsequent move by Saudi to increase it resulted in an effective halving in the oil price. Whereas Russia's action made sense it is difficult to see what Saudi hoped to achieve (apart perhaps from damaging US shale) given the impact on its own domestic stability. However, this was all about supply side pricing.
What neither country probably realised at the time those decisions were made was the impact that Coronavirus was going to have on demand side pricing. It is now clear that it is going to be huge. These are the key factors:
- the West is going into lockdown, dramatically reducing the need in particular for aviation spirit, petrol and diesel. China could be slowly recovering but has good unused stocks and its ongoing demand will be lower than it has been due to lower demand around the world for its products,
- the northern hemisphere is coming into spring, reducing heating fuel needs,
- the lockdown will reduce the normal summer increase in transport fuel use,
- the slowdown in consumption has increased stocks, built up in anticipation of demand but not used,
- the stock of tankers are currently filling up but with fewer customers around to take their contents.
All previous shocks to the oil market have been supply side based, this is new, a demand crash. We are, as they say, in uncharted waters.
If one of Russia's objectives was to start a chain reaction to hit the US financial system, probably by accident they have hit the bullseye. The link below takes you to an article describing the dire straits that the US is in, although not many there realise it yet.
Whereas this might be catastrophic for the US, as the home of the $, the largest oil companies, a major oil producer and high debt, it is not so much for places like the EU a heavy oil/gas consumer. Once the corona virus crisis is over China, Russia and the EU are going to power out of it together, maybe ignoring the crippled US, who clearly have been very selfish in the crisis. Feel a bit sorry for Norway having to go back to living on its fish and industry, they will have to become friends with the Russians as well.
Now read the article and let what he says sink in.