Three reasons for the fall in oil prices

US, WASHINGTON (ORDO NEWS) — Norwegian oil companies are alarmed. Something makes experts fear that the crisis will worsen.

Oil prices have a very strong effect on the income of our state and the Norwegian oil industry. Therefore, they are also very important to support the welfare of the state and the situation on the labor market.

In two weeks, the price per barrel (159 liters) fell by half – from $ 51 to $ 25. For an oil and gas exporting country such as Norway, this is dramatic news. Approximately 19% of the revenue the state receives from the oil sector.

The price of oil depends on many different factors, but why is it so rapidly falling now?

Today, oil prices are at their lowest level since 2003. A price crisis is shaking the world, which is trying to repel the attack of the coronavirus.

1. Coronavirus: anxiety, safety measures and reduced oil consumption

The global pandemic has caused a lot of trouble to European oil companies and oil companies. Bans on entry and exit, shortage of goods, quarantine and significant budget cuts – these are just some of the obstacles to their work.

But first of all, the drop in oil prices is due to the fact that the world has begun to consume less of it due to measures taken because of the coronavirus.

Both Scandinavian Airlines (SAS), Norwegian Airlines (Norwegian), and Widerøe have canceled thousands of flights. Air carriers around the world do the same. The analytical company Rystad Energy believes that this year the world will spend 12% less fuel on flights because of coronavirus than in the past, and this is even assuming that all borders are open in the fall and canceled flights.

Traffic is expected to decrease, which means that demand for gasoline and diesel will also drop significantly. Rystad Energy predicts that car traffic in 2020 will decrease by 2.2% compared to 2019. This means that 1.1 million barrels of oil will be consumed daily less. In China alone, diesel and gasoline production took 1.5 million barrels per day less than usual in February, Rystad Energy reports.

Because of the coronavirus, almost all of Europe is quarantined, and the United States declared a state of emergency and banned entry from Europe. According to the analytical company, by and large, oil demand in 2020 will decrease by 2.8%, or 2.8 million barrels of oil daily.

2. Saudi Arabia and Russia lost patience and unleashed a price war

In recent years, two of the three largest oil producers in the world, Saudi Arabia and Russia, have collaborated. Their goal was to limit oil production in order to maintain a high level of prices. The largest US oil producer, which began exporting only in 2011, today supply huge quantities of shale oil to the market.

The United States could flood the world with its shale oil if the OPEC oil cartel, which is de facto headed by Saudi Arabia, did not agree to reduce production in cooperation with countries such as Russia.

But that was before the coronavirus.

It might seem like a sudden madness to the outside world, but Russia broke off the agreement concluded with OPEC in 2017. When the oil cartel proposed to reduce oil production due to the spread of coronavirus, the Russians stood on their hind legs. Saudi Arabia should have provided a large share of the decline if Russia and other oil producers also agreed to participate in this. But the Russians were tired of all this, and they left the negotiating table – it seems, forever.

Instead of taking matters into their own hands and calling on OPEC to further reduce production and calm, the leader of Saudi Arabia made the exact opposite decision. The vengeful kingdom unleashed a price war, which could cause OPEC countries Iraq, Ecuador and Venezuela no less damage than Russia and the United States.

Since Saudi Arabia has made it clear that it is ready to sell large volumes of cheap oil to Asia and Europe in the future, the price of oil has fallen. Iraq called on everyone to come to an agreement to prevent a bloodbath in the oil market. According to Bloomberg, Russia on Wednesday acknowledged that low oil prices are very harmful to her. But Saudi Arabia continued to add fuel to the fire, saying it would produce 12.3 million barrels of oil daily in the coming months.

3. Arabs and Russians want to crush the United States

The shale tsunami in the last decade has put the oil market on its head. Shale oil is produced using new sophisticated technology. Thanks to her, the United States, which used to be a major importer of oil, switched to self-sufficiency and even became its largest producer.

Both Russia and Saudi Arabia know that the United States will have the worst out of a price war because American shale oil is more expensive to produce than Russian and especially Arab oil. Low oil prices will have enormous consequences for American oil companies and the American economy as a whole, as Russians spoke about at the OPEC + meeting.

The Americans were already experiencing price pressure, but now they are facing a test comparable to the explosion of an atomic bomb in the oil market, said Rystad Energy analyst Louise Dickson. At the same time, none of the oil-producing countries will earn anything at extremely low prices. For example, it is expected that the revenues of the Russian oil and gas industry due to the price war this year will be 440.8 billion kroons (about 3 trillion rubles) lower than planned.

The director of the International Energy Agency earlier this month warned against the risky game of Russia and Saudi Arabia.

“Playing Russian roulette in the oil markets can be very dangerous. This can have serious consequences, ”said Fatih Birol.

Oil Price May Still Fall

Today, oil prices are at the lowest level since 2003, even lower than the prices that rocked the Norwegian economy and the oil industry from 2014 to 2017. Experts resort to such words as “carnage”, “crisis” and “madness”, describing the situation. But can oil prices fall even lower?

Rystad Energy expects countries such as Saudi Arabia, Russia, the United Arab Emirates, Kuwait, Iraq and possibly Libya to bring another 3 million barrels of oil per day to the market, in addition to current production levels. As a result, there will be much more oil than the world quarantined due to the coronavirus needs, and the price of it will fall to the lowest levels in history.

Jarand Rystad told Dagens Næringsliv on Wednesday that the price could drop to $ 10 a barrel.

“These are the most dramatic events in my memory. They can be compared with the financial crisis, Chernobyl and the oil crisis of 1986, ”Ristad Dagens Næringsliv said.


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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.