On Friday the three-year deal between OPEC and oil exporters outside the group ended when Russia refused to join a further output cut to support oil prices while the market was under pressure from the effects of the coronavirus epidemic.
Until this week, the OPEC+ agreement had managed to keep prices stable since 2016, between $50 and $75 a barrel. But prices plummeted $15 a barrel on Monday in the biggest one-day drop since 1991 after Russia walked away from the deal. OPEC’s leading players then announced plans to lift oil production levels to full capacity. New York oil futures stood at $33.63 on Wednesday, versus $48 a week ago.
With no restrictions on supply, the world’s top producers are expected to see lower overall revenues, economists say, because the extra output does not compensate for the value lost in the price.
“Based on our calculations, every $5 decline could lead to a 50 billion Saudi riyals [$13 billion] increase in Saudi Arabia’s fiscal deficit if the expenditure remains the same,” said Mazen Alsudairi, head of Al Rajhi Capital research.
Maintaining balance between oil supply and demand, and avoiding gluts, is a simple formula to provide optimal revenue to oil exporters, enabling them to invest in future production, and fund budget expenditures. They are the biggest losers in an oil crash, but there are other winners and losers throughout the economy, here is a list of some of them:
Consumers: Lower oil prices equal lower prices at the petrol pump – something US President Donald Trump was quick to note.
Good for the consumer, gasoline prices coming down!— Donald J. Trump (@realDonaldTrump) March 9, 2020
Households that rely on heating oil to warm their houses in winter are also big winners.
Energy-intensive industry: Transportation is one sector heavily affected by the price of oil, but all industry that requires intensive energy input, such as aluminium smelting, cloud computing storage farms and manufacturing, benefits from lower energy costs. Traditionally a low oil-price environment is also good news for airline companies, but the coronavirus epidemic is already causing airlines to go out of business.
Emerging markets: Emerging market countries, especially China, the world’s largest crude importer, generally benefit from cheaper oil because as it powers their economic expansion. Despite the ongoing coronavirus crisis that has sharply curtailed economic ambitions in Asia, China is reportedly considering importing more oil to hold in reserve as prices continue to decline.
Oil refiners: Refining companies, which operate using oil as a main ingredient in the manufacturing process, benefit from having this resource at a lower price. Many big oil firms have both production and refining arms and will therefore overall suffer from a lower price environment, but those companies that focus purely on refining will likely see an uptick in cash flow.
US shale: Many US shale oil companies were already operating at a loss even before the latest price crash and many are highly leveraged with debt, according to Alsudairi. A prolonged period at current prices could lead to a significant number of bankruptcies in the sector.
Renewables: Implementing renewable energy solutions becomes less attractive when fossil fuels become cheaper.
Investors have already taken note of this, with stocks in electric car and battery manufacturer Tesla falling around 10 percent since the start of the week in line with falling oil prices.
Oil services: Companies that focus on servicing the oil and gas industry will suffer while their customers, the oil companies, are receiving less profits. Oilfield servicing company Schlumberger was trading down around 25 percent on Wednesday compared to Friday last week.
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