Oil prices slump as OPEC-Russia output deal collapses, prospect of price war emerges

The price of crude oil has fallen by just over a third since last Thursday ($50/bl) after the production sharing deal between OPEC and Russia (OPEC+) seemingly collapsed following an inability by the group to agree a concerted response to the coronavirus outbreak. Having fallen by approximately 10% on Friday, the price of oil has dropped by another 24% in early Monday trading to under $36/bl, taking the price of front month ICE Brent Crude to its lowest level since February 2016.

Talks on Friday between the two parties included plans for a reduction in output to mitigate the effects of falling demand resulting from the coronavirus outbreak. However, despite Saudi Arabia – as the de facto head of OPEC – pushing for such a move, Russia rejected the action. In response, Saudi Arabia announced over the weekend that it would be reducing the prices it charged customers for its oil output, potentially representing the first steps in new attempts to boost market share through price competition.

Expectations for oil demand have remained dependent on the global economic outlook, and as a result – given the lack of a resolution to the US-China trade dispute – over the course of 2019 there were progressive reductions in forecasts of the growth in oil demand from the International Energy Agency (IEA).

The potential for declining demand has been exacerbated the situation surrounding the coronavirus and its impact on economic output (due to business and factory closures), transport (aviation fuel and petrol) and global trade. With global oil output currently expected to remain above demand, the prospect for another oversupply situation – and its resultant impacts on prices – remains apparent.

Established in 2016 in an attempt to stabilise the price of oil, the OPEC+ production sharing agreement defied expectations to largely succeed in reducing the prevailing surplus in the global crude market. A previous attempt at cooperation between OPEC and Russia in 2001 fell apart after Russia failed to meet its commitments on reducing output, although the 2016 deal had largely met its primary objective.

Both parties agreed to make progressive reductions to their crude oil output in a move that took the price of crude from $28.00 per barrel ($/bl) in January 2016 to a high of approximately $86.00/bl in October 2018. However, with oil prices having declined by around 25% since the start of 2020 ahead of the meeting, doubts were circulating in the markets that the parties could reach agreement – particularly in the presence of high US shale oil production.

In terms of the impacts on UK energy markets, while the commercial link between oil and gas prices has been progressively eroded in recent years, the sentimental links remain, However, the NBP gas market was already experiencing the lowest prices in over a decade given confidence over supplies and a glut of LNG cargoes, while it was a similar story in the power markets. As such, this fresh drop in oil prices has the potential to trigger further declines in the UK wholesale (and in turn, the retail) gas and electricity markets.

Our training services

These issues and more are covered in Cornwall Insight’s Introduction to Gas & Electricity Wholesale Trading course, which will be taking place on 16th June 2020. As wholesale markets become more volatile in the presence of wide-ranging socio-economic factors, a changing generation mix and the impacts of international markets, there has never been a more important time to understand the fundamentals that underpin trading rules and the commercial behaviours that players in the market take.

In addition, Cornwall Insight also provides bespoke in-house and remote training services, with subjects including risk management and understanding value at risk (VaR) workshop.

If you would like more information on our training services, please contact Ed Reed at e.reed@cornwall-insight.com (01603 542129) or click here.

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