Oil Prices Crash By 12.5% Again – Why And What This Means For You?
By Editor, Bear Market
Oil futures contracts have been extremely volatile in 2020. This after ending 2019 stable in the $60 to $70 per barrel range from July to the end of December 2019.
This year, things are drastically different for oil prices.
On January 6th, 2020 oil futures contracts hit their 2020 high of $63.97 per barrel. Then proceeded to crash to negative $40 per barrel in April due to coronavirus related demand issues.
Since then oil contracts were back up to around $40 per barrel from April to May. But now in early June oil futures contracts are falling again. As of this writing the price on the June contract is now down to $35 per barrel.
What’s going on with this crazy ride in oil? And how does it affect you?
In today’s article I’m going to explain these things for you.
But first I need to tell you why oil originally crashed in April.
Why Did Oil Crash In April?
On March 8th, 2020, Saudi Arabia announced that it couldn’t come to an agreement with other OPEC cartel members on production cuts.
Specifically, Saudi Arabia is at issue with Russia – who is considered in the OPEC+ membership group.
Due to these disagreements, Saudi Arabia boosted production even higher.
This wasn’t a wise decision on their part in the short term.
Since 2009 oil is already oversupplied after the United States figured out better ways to extract oil from rocks and other material in the so-called shale fracking market.
This boost in production by Saudi Arabia from an estimated 9.7 million barrels per day to 12.3 million barrels per day when supply levels for oil are already high sent future contracts on oil falling 30% in overnight trading on March 8th, 2020.
Won’t they be hurt by this too?
Yes… But it would take a while.
Saudi Arabia is the lowest cost producer of oil in the world at an estimated cost of $10 per barrel.
For example, United States based oil companies are said to be “unprofitable below $30 per barrel. And as of November 2019, Russia’s estimated cost per barrel was around $43.
For what it’s worth, both Saudi Arabia and Russia say they can last years at $25 per barrel prices without issue.
While I doubt that, oil companies in those two (2) countries can certainly last longer than oil companies in the US at those prices…
Saudi Arabia especially has a huge cost advantage, so they can quickly recover.
What they’re trying to do is make some other oil producers go bankrupt at these low and sometimes unprofitable levels.
The speculation is that they want US companies to go out of business… Of course, these low oil prices would also harm Saudi Arabia’s long-time international rival Iran as well.
They want to do this to take some of the supply out of the market, so prices can rise.
They’re hoping to inflict short term pain on their competitors and allies, with the hope that in the long term, this will jack up oil prices.
Is it likely to work? Yes. In the short term.
Back in the 1890s and early 1900’s, John D. Rockefeller’s Standard Oil was the largest producer of oil.
At its height, Standard owned an estimated 88% of refining capacity in the world and it pulled this same kind of tactic on occasion as well.
Oil and gas is one industry prone to cyclicality in supply and demand.
On occasion, there will be a slump in production that will drive prices higher… And on the flip side, this goes the other way too, with too much supply driving prices lower.
This law of supply and demand has gone on in the oil industry for more than 100 years.
As the lowest cost producer, Saudi Arabia and Standard before it, can still earn profits or at least, break even, while competitors get more and more unprofitable.
Saudi Arabia is learning from Standard Oil’s playbook and trying to force its competitors to get out of business or go bankrupt.
And like I said above its likely to work… But, not to the degree that Rockefeller’s plan did.
There is far more competition today than there was in the 19th century when Standard was in power…
As of the end of 2019, total world oil production stood at an estimated 81 billion barrels per day.
The United States was the largest producer at 15 billion barrels per day – or 18.5% of total world production.
Saudi Arabia ranked 2nd at an estimated 12 billion barrels per day – or 14.8% of the world’s total.
This is a far cry from the 88%+ in market share Rockefeller enjoyed in Standard’s heyday.
While Saudi Arabia has enormous power to hurt economies, companies, and countries with these price cuts… They don’t hold the enormous power Rockefeller enjoyed.
So, their strategy of cutting prices to bankrupt companies while likely to work… Won’t work to the degree that Rockefeller’s price cuts did. Not even close.
This is why on April 12th OPEC+ countries – along with the US – decided to cut 10 million barrels of oil production per day from the global supply.
Not just because there is too much oil for “normal” times… But there is far too much oil when demand is lower like it is now during the coronavirus crisis.
Lower demand in this case is due to people not driving or flying as much due to restrictions and fears related to the virus.
Shortly after this, oil storage levels reached near capacity in mid-April which sent prices cratering to negative levels for the first time ever.
These things combined – the brief oil price war, combined with too much production, and oil storage facilities reaching capacity – made oil futures contracts crater on April 22nd, 2020. To negative levels for the first time ever.
Since, then demand picked up a bit and oil storage levels fell with the fall in production. These 2 things led to oil prices rising from their historic lows in April… Until now.
Why Oil Is Crashing Again
The above recap brings us from March 8th, 2020 to June 6th, 2020 a few days ago. On this day OPEC+ countries agreed to extend the cut in production through July 2020 now.
Great for oil prices and companies, right?
Yes. But it’s still not enough.
Oil prices began crashing again on June 10th after the Energy Information Administration (EIA) in the US showed that crude oil inventories rose by 5.7 million barrels in the week of June 5th.
Analysts expected a moderate rise of around 1.5 million barrels of oil or even a fall of inventory in this period.
This surprising rise was due to continued lack of demand with people not driving or traveling as much. Combined with still too much production for the current lower level of demand.
On top of this, on June 10th, 2020 US Federal Reserve Chairman Jerome Powell outlined The Fed’s bearish outlook for the rest of 2020. And even for 2021 due to the coronavirus.
Chairman Powell said Federal Reserve projections show unemployment in the US staying at least at 9.3% by the end of 2020.
He also said The Fed “doesn’t envisage unemployment returning to anywhere near its pre-Covid19 rate of 3.5% even by the end of 2022.”
Plus, he also said The Fed plans to keep interest rates near 0% until at least 2021 as well. This due to the economic issues caused by the coronavirus and the subsequent lockdowns.
Also, on this day, news began circulating in the mainstream media about a “second wave” of the coronavirus either beginning to hit now.
This due to cities and states beginning to see more coronavirus cases after reopening their economies. And due to the still ongoing protest nationwide.
The media’s also saying they now expect a second wave of the coronavirus will hit in the Fall.
These things combined have sent per barrel oil contracts falling by 12.5% as of this writing.
What This Means For You
Oil price volatility is back.
So are major concerns about the US and global economy related to continued low demand, consumption, and travel due to the coronavirus.
These reasons are why oil prices are falling again.
Look to fill up your gas tank cheaper in the coming days as we enter the traveling season here.
Keep an eye on any investments you have in the oil and gas arena… Specifically watch for companies having too much debt in relation to their cash.
We’re now 3 months into this crisis… Things are bad now. And if people don’t get back to normal entire industries could crumble.
Goldman Sachs even warned that the U.S. shale oil industry could collapse on June 11th 2020.
To learn about some of the other impacts the coronavirus is taking on our economy check out the following articles to see how this will affect you and the entire economy…