[Global Insight] Why are stocks, oil prices continuing to crash?
Arirang News notes:
Oil prices have fallen sharply for four consecutive weeks now. Slumping by more than 60 percent since the turn of 2020. As the coronavirus pandemic continues to severely disrupt business, travel and daily life, demand for crude has been plunging, and major producers like Russia and Saudi Arabia haven’t helped the situation by launching an intense price war.
This is stirring even more volatility in global stock markets as the world economy reels from the coronavirus pandemic. It’s a time of uncertainty but to provide us with a better sense of what might lie ahead, we’re joined by Dr. Kang Wu, Head of Analytics, Asia at S&P Global Platts, and Tony Nash, CEO and Founder of Complete Intelligence.
Let’s first talk about the losses seen on Wall Street on Monday. Dr. Wu, starting with you: U.S. stocks ended in the red, after a two trillion dollar coronavirus support package failed to pass the Senate for the second time. And stocks have been extremely volatile in recent weeks despite the Federal Reserve having cut its interest rates twice this month and rolling out other never-seen-before measures. Why have these moves failed to reassure investors and are you expecting markets to fall even further?
This is a very volatile time and overall the demand globally on commodities and on the economy is very weak. So it’s a panicking situation for many economies. It really is up to the individual governments to stimulate the economy and global organizations. I do see that the current downward pressure on the economy and the commodity market will continue until we have a solution. However, the government of the US and other countries and the Fed could help the situation.
Oil prices have also been getting battered day after day, due to lower demand and this oil price war between Saudi Arabia and Russia. Mr. Nash, Moscow started it by refusing to agree to cut its oil production. It’s a dangerous game of chicken so what are they aiming to gain from this brinkmanship?
I think they’re just aiming for more say in the trajectory for crude. This is really a capacity game. Russia doesn’t have the additional capacity available really to go to up against Saudi Arabia. Saudi Arabia has a lot of capacity available. So if Saudi Arabia wants, they can continue producing more volume. The problem is neither government can afford to produce at these rates. They need crude prices about $20 higher than they are right now. So we don’t see this as viable for either government for much longer.
Dr. Wu, you were in charge of research in global energy markets in Riyadh. What do you think MPS’s strategy is. Can either country afford this war and who do you think will blink first?
I agree that there is an issue with the physical budget for Saudi Arabia and similarly there is the issue of the budget for Russia. However, in terms of how long we can sustain the current low prices also depends on how they are fiscally and the reserves they have.
Saudi Arabia oil is very important. Crown Prince has been trying to very hard to diversify the economy of Saudi Arabia. So currently the overall oil market is in turmoil in a way that they have very few strategies to pursue. One is to preserve the prices and the other one is to preserve the market share or drive out competitors. So it seemed that after three and a half years of trying the price defense, now they are turning to another strategy to drive out the competition in the oil market.
Dr. Wu: With the impact of COVID-19 on markets and economies around the world, what dangers lurk around the corner if this oil price war rages on for a prolonged period of time? Is it a potential nail in the coffin for many oil companies who were already struggling to turn a profit when oil was 40 dollars a barrel, let alone 20 dollars?
Many companies, many players will get hurt. Other OPEC producers and exporters, smaller ones other than Russia, which is an OPEC and a Saudi Arabia, they will get hurt, and globally, US shale oil producers and Canadian heavy oil sands project operators, if the low oil price continues. Once you know that the global oil storage is running to the limit, then there’s no choice. Some have to give up. Some have to reduce production. And that will start from the high oil producers around the world.
Mr. Nash: Some say the motivation behind this price war is to hurt U.S. shale gas producers? Do you agree and will it work? Can the US Shale industry complex survive a prolonged stretch with oil basically being given away? How should the U.S. government react to this?
In 2015, we saw OPEC really take that aggressive stance against shale producers. I think it failed because US authorities tried to, and very effectively, extended credit to shale producers. I think this time that those same or even more aggressive instruments will be put in place to defend shale producers.
That’s not to say everyone is going to be healthy. That’s not to say there won’t be consolidation in shale. It’s also not to say there won’t be kind of closed downs in places that are really expensive like Colorado and other places to produce. But I think in general, the aim is to ensure that the volume of shale production in the US stays relatively consistent and that the US can continue to be a net producer of crude and I think that’s really what the US is focused on.
So I see this as a Saudi-Russia issue, and perhaps a Saudi-Iran issue as much as it is a kind of Saudi-Russia-Shale issue.
As an aftermath of this, what do you think the long-term impact would be on oil markets on all companies across the world?
Crude companies have to become much more efficient. There’s a lot of automation, there’s a lot of other things that can happen within oil companies. There’s a difference between national oil companies and independent oil companies. so the national oil companies are typically pretty inefficient, and they’ll probably stay that way. The independent oil companies, really the private sector ones, will have to get even more competitive, which there’s plenty of room for them to get competitive and I think they’ll be the healthier ones in the long run.
Dr. Wu: OPEC’s current production cut deal expires at the end of the month. Do you see prices dropping even further after that? (and if so, how would it affect broader financial markets?)
Yes, I do. At the end of the month, I do not see that Russia and Saudi Arabia will come back to the negotiation table very soon. Eventually, they might. But not in a very short time. So April is probably a pretty challenging month for the oil market as the demand continued to drop due to the pandemic of the Coronavirus and oil production. Not only the price formulas by Saudi Arabia, but physical supply of OPEC, particularly Saudi Arabia UAE will increase. That will put a lot of pressure on non-OPEC producers, which are more dominated by independent in North America. Of course also national oil companies as well. At the end of the day, the market needs to be balanced. So Asian players included can buy more oil but up to the limit of the storage, up to the limit of the current state of demand, which is very, very weak.
What do you think, Mr. Nash? Do you think there’ll be another oil cut, though?
It’s possible. What we’re seeing is we think the last half of April we’ll actually see prices return. We think toward the end of April, we’ll start to see prices back in the 40s. So things may get slightly worse in the short term, and anything is possible. But we know within the 40s, crude prices are depressed anyway. We’ve started to see Asia really come back online post-Corona and we’ll see that kind of move westward as well. So that consumption capacity as that comes back online, that will put pressure on prices.
The pressure between the Saudi government and the Russian government, their fiscal revenues, there will be serious pressure there. And you can bet there’s probably pressure from the US government on the Saudis and the Russians to resolve this. So I think that pressure will only intensify over the next two weeks. And we’ll see some resolution say mid-April or third week of April.
Thank you very much for joining the program today Dr. Kang Wu, Head of Analytics, Asia at S&P Global Platts, and Tony Nash, CEO and Founder of Complete Intelligence.