US, WASHINGTON (ORDO NEWS) — Saudi Arabia repeated the mistake made in November 2014 by increasing oil production during a collapse in oil prices. In 2014, this led to a depression in the oil sector. This time, such a move could be a turning point in the global economic depression.
On Saturday, March 7, after a series of discussions, Saudi Arabia and Russia did not conclude an agreement to reduce production. On Sunday, Saudi Arabia announced a reduction in prices and a desire to increase production. The next day, an unprecedentedly large one-day drop in oil prices began.
Up to this point, the situation with oil prices did not look very good. In early January, prices peaked amid the assassination of Iranian general Soleimani, the announcement of a trade agreement between the US and China, and a decrease in OPEC + production. The price rally was doomed, as it was based on sentiment, not fundamental market factors.
Then the coronavirus began to spread everywhere, due to which oil prices collapsed. Saudi price cuts in March accelerated a collapse in oil prices in wider markets.
Why did this happen
Mohammed bin Salman, the crown prince of Saudi Arabia, issued an ultimatum to the President of Russia Vladimir Putin : cut oil production on its terms. Putin did not accept the ultimatum, bin Salman cut prices and announced an increase in production.
It should be noted that between 1981 and 1985, the Saudis reduced production by 6.8 million barrels per day, hoping to stop the fall in oil prices amid new supplies from the North Sea, Siberia and Mexico. King Fahd was tired of reductions without the help of OPEC allies and without price reductions. He fired oil minister Ahmed Yamani, cut prices and expanded production.
In 2014, world oil prices fell again. Saudi Arabian Oil Minister Ali al-Naimi has called on Russia to join OPEC in terms of reducing production. Russia refused. Saudi Arabia lowered prices and expanded production.
The fundamental principle of the Saudi oil strategy over the past 30 years has been to no longer make the mistake it made by cutting back on production in the early 1980s. Analysts and journalists who are convinced that there is a price war or a war against US shale oil production should study history more thoroughly and not invent meaningless memes.
“The coronavirus epidemic will lead to an unprecedented global economic downturn,” said Lee Edelkoort.
Due to the huge gap in economic activity, especially in the US and China, global depression is becoming almost inevitable.
Energy is an economy. And most of the world’s energy comes from oil. The decline in oil will affect other commodities and currencies. And despite the fact that a drop in oil prices was inevitable due to coronavirus, the recent decline in prices in Saudi Arabia and increased production have exacerbated its impact on the global economy. All this can turn into a Lehman moment.
GDP will fall as oil consumption decreases. However, it is not entirely clear how much the US and China dominate this relationship.
Figure 3 shows two graphs that use the same data. On the graph on the left is the logarithmic scale, on the graph on the right is the Cartesian scale.
The left graph shows the correlation, the right graph shows the disproportionate influence of China and the United States on both GDP and oil use. Together, they account for 32% of global GDP and 34% of oil consumption.
Oil consumption in China may fall by 4 million barrels per day in the first quarter of 2020. If it returns to normal by the second quarter (which is unlikely), this will mean a 1% drop in annual global GDP. The situation is not normalizing in China, due to the recession in the USA, consumption will fall not only in the 1st quarter, not to mention a decrease in consumption in the rest of the world. So it’s hard to imagine a different outcome of events besides depression.
Between falling prices and demand there will be a lag and a reduction in production. Stocks will accumulate, some expect global reserves to be depleted by summer. It is reasonable?
Figure 4 shows the accumulation of comparative reserves that accompanied the latest collapse in oil prices in 2014. It has been 5 months since the start of the price reduction, until CI reached the average value for 5 years. Another 18 months passed before peak storage was reached and the lowest price. Despite analysts’ expectations, neither the US vaults nor global vaults were full.
The comparative volume of stocks is now slightly below the 5-year average. Assuming that now there will not be the same fast filling speed, it will not be possible to reach maximum storage levels until July 2021. The price of WTI at $ 28.70 is almost as low as the minimum level reached 4 years ago, which suggests that the price may fall much more before it reaches the bottom.
It is unlikely that the virus will be localized until the second half of 2020. That is why we should expect economic depression and oil prices at $ 20 or lower in the near future.
When the normal course of the disease develops into an epidemic, this is called a tipping point. The moment when small changes destroy the balance of the system and lead to large changes.
And that moment has already come. Moreover, this is not a coronavirus, but a turning point in our civilization.
From an emotional point of view, modern people are not much different from hunter-gatherers in the African savannah. The belief that the space and resources of the entire planet belong only to us and we can use them as you like, no matter what consequences it brings to the Earth.
Economists have developed an economic system in which economic growth is most valued. In the past century, oil, more than any other factor, has been a defining moment for economic growth. When growth began to slow down, oil went up, people turned to debt. This led to a future surplus of energy.
The financial crash of 2008 was a clear sign that debt deletion was necessary. Instead, smart ways have been developed to solve the debt problem by increasing debt.
Coronavirus abruptly stopped the growth mechanism. The fear of infection is spreading everywhere – the original fear of a person. Markets are crumbling, there are no solutions yet. More and more people remain in isolation.
The world has crossed the threshold. Yes, the spread of the virus will end, and this is not the end of the world. However, some things will not be the same as they were before the tipping point. It is necessary to find a balance, to come to a balance – with ourselves and with the planet. And learn how to live with less.
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The article is written and prepared by our foreign editors from different countries around the world – material edited and published by Ordo News staff in our US newsroom press.