Let’s begin with the figures. Since early March, the price of the two most famous benchmark crudes (WTI Crude and Brent Crude) suffered from a historical decline.
On March 2, the WTI quoted $46.75 and the Brent Crude, on the same date, quoted $51.90. On the late of March, precisely on March 30, the WTI price dropped below $20 ($19.92), something never seen since 2003 and the war in Iraq. The Brent plummeted to $23,03 on this same day.
Those figures represent a drop of 57,39% for the WTI price and 55,62% for the Brent price during almost the whole month of March.
The oil industry has been hit by both a demand and a supply shock this month as the Coronavirus pandemic reduced fuel consumption and top producers fight a price war by raising output to full capacity.
First, the pandemic forces people to stay at home, which reduces population moves, consumption, travels … the economic activity broadly speaking. Hence, it reduces the global economy and therefore the oil demand since the economy relies on oil energy. The global oil consumption is therefore shrinking and the price too.
Second, that demand shock was aggravated by a supply shock after Saudi Arabia and Russia didn’t find an agreement about reducing oil production at the beginning of March. Their talks were about stabilizing oil prices in order to face coronavirus impacts on their key industry. Therefore, after the talks collapsed, Saudi Arabia decided to increase its oil pumping to a record of 12.3 million barrels per day. This offensive action has one objective, flooding the market and squeezing profit margins. It was quite a surprising action for the kingdom which, for decades, adjusted the oil output in order to stabilize prices as the leader of the OPEC (Organization of the Petroleum Exporting Countries).
To sum up, the COVID-19 created a demand shock on the oil industry that was aggravated by a supply shock, those suppliers flooding the oil market that does not need it. The consequences of those shocks is a plummeting of oil price that squeezed margins. Hence, only the producers with low cost of production could compete at around $20 the barrel and that is not the case for a lot of American ones. The USA, which is actually the first oil supplier worldwide (above Saudi Arabia and Russia) with a production of 13 million barrels per day could cut its production down by 2.5 million barrels per day, some analysts say.