Where do we go from here?
Sproule Market Commentary, March 10, 2020
Considering the recent significant volatility in global crude markets, Sproule has outlined key information underpinning the volatility, as well as our commentary on where we go from here.
Global Crude Demand
- As a result of the COVID-19 outbreak, the latest IEA projections show global oil demand falling by 90,000 bpd in 2020, the first year-over-year drop in oil demand since 2009.
- Most of this decrease in demand is due to COVID-19 induced contraction in Chinese demand. China accounted for 80% of global oil demand growth in 2019.
- Other economies globally will continue to be negatively impacted by the COVID-19 outbreak with further downside risk to demand, although the magnitude will be a function of the scale and duration of the outbreak in major markets.
Global Crude Supply
- On March 6, 2020 members of OPEC plus Russia failed to reach an agreement on increasing production cuts to help support falling crude prices caused by decreasing global demand.
- Saudi Aramco has reduced its Official Selling Price for April Arab Light crude by $6 US/bbl for Asian customers, as well as signalling that it will increase April production to 12.3 mmbbl/d, or roughly 2.6 mmbbl/d above current levels. This is roughly 300,000 bbl/d above Saudi Aramco’s maximum sustainable capacity of 12 mmbbl/d.
- Russia is prepared to increase production by as much as 500,000 bbl/d in the near future.
The near-term impact of both COVID-19 and the Saudi-Russia oversupply tactics will be significant, and we are expecting a period of heightened market volatility. Longer-term, we do know that current spot prices are materially below the marginal cost of supply in a world consuming roughly 100 million bbl/d of crude, which tells us that current prices are not sustainable long-term. However, substantial supply rationalization to match demand will be needed for stability to return in a rebalanced market. Sproule will continue to monitor the situation and adjust our price forecasts with both the near-term volatility as well as long-term market fundamentals in mind.
Please note: the February forecast did not incorporate market information released after February 29, 2020.