Why oil prices collapsed despite OPEC + agreement

US, WASHINGTON (ORDO NEWS) — Oil prices on world markets continue to show a record decline, despite promises by major producers to reduce production and supply. Why is this happening and what are the forecasts of experts for the coming period?

After violent trading on the New York Mercantile Exchange, the value of the May futures per barrel of oil for the first time in history fell below zero. Bidding ended on Monday.

American WTI crude oil lost in value about $ 56, that is, 306%. The price of futures for Brent crude oil fell to $ 25.57 per barrel.

The amount of oil in United States storage facilities is growing rapidly, especially in Cushing, Oklahoma, where West Texas Intermediate is being shipped, as refineries are shrinking in low demand.

Ahmad al-Nuaimi, a Qatari oil expert, told Al Jazeera that US oil storage facilities will soon be full since 19 million barrels arrived in just one week. This led to a decrease in the price of American oil to below $ 15 per barrel, after which the decline continued.

According to An-Nuaimi, the volume of oil reserves in tankers currently stands at 160 million barrels. This is a very large volume, which increases the oversupply in the markets.

Why did prices fall?

As An Nuaimi explains, oil prices are heavily influenced by both supply and demand, which has not been observed before.

Oil prices, on the one hand, according to the expert, will be affected by a significant decrease in demand, especially from China, the largest consumer of crude oil in the world, because of the consequences of the coronavirus pandemic on global economic activity. On the other hand, they will be affected by the presence of large reserves, whether on land or in tankers at sea, as well as weak demand from refineries.

An-Nuaimi emphasized that market players are closely monitoring changes in the volume of oil production (supply) by producers, as well as changes in demand from consumers, which explains their current caution.

April is a month of waiting for fulfillment of obligations under the agreement of OPEC + countries and other manufacturers led by the United States, which is due to begin in May.

According to oil expert Ahmed Badr al-Koch, the drop in prices that we are currently observing is a highly anticipated phenomenon. This indicates that the growth that occurred after the conclusion of the agreement was temporary, and soon prices began to decline again.

According to Al-Koch, before the conclusion of the recent agreement, that is, during the period of low prices, countries accumulated a large amount of oil. In other words, price increases depend on the extent of absorption of these stocks.

Markets were flooded with cheap oil after Saudi Arabia, a member of the Organization of Petroleum Exporting Countries, launched a price war with Russia (not a member of OPEC) to gain the largest market share.

Nevertheless, the two countries resolved their dispute by concluding an agreement earlier this month. Together with other states, they agreed to cut oil production by about ten million barrels per day in order to stimulate markets.

However, analyst Ahmed al-Nuaimi believes that at a time when oil-producing countries (including the United States, Mexico, and other countries) promised to cut oil production by a total of about 20 million barrels of oil and thereby support market prices, forecasts promise a decrease in demand by approximately 30 million barrels per day in May. This indicates the formation of serious surpluses, estimated at 10 million barrels per day, which again provokes a decrease in prices.

Warnings and Predictions

According to An-Nuaimi, if the crisis caused by the coronavirus pandemic does not end, oil demand will remain small, and this will again affect prices – they will continue to fall. It is very difficult to guarantee prices within $ 40 until the end of this year, in case there are signs of a pandemic.

“But if the situation remains the same as it is now, WTI crude oil prices may fall below the current level, and Brent crude oil prices may drop below $ 20,” An Nuaimi said.

For his part, Ahmed al-Koch ruled out an increase in oil prices, despite the conclusion of an OPEC + agreement to reduce production. He said: “We will not witness a serious price increase until the end of this year.”

The expert added that the price of $ 40 per barrel is currently an unattainable goal, but this could happen by the end of this year. In his opinion, oil prices will fluctuate, rising and falling by five dollars, and the low price is due to an overabundance of reserves compared to the current volume of world demand. The latter contracted as a result of an epidemic paralyzing the global economy.

Is there a need for a new agreement?

Al-Koch sees no need for a new agreement between the major oil producers and emphasizes the importance of implementing the existing treaty in order to stabilize markets.

According to forecasts, oil prices will depend on a decrease in stocks, on the one hand, and an increase in demand, on the other, which in turn will be determined by the effectiveness of measures taken to combat coronavirus and economic growth, especially in China.

Trying to resist the coronavirus, most countries of the world resorted to closing borders, canceled trips and announced quarantine, which seriously affected global economic activity, and oil prices in recent weeks have fallen to record levels over the past two decades.

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