Oil Prices - Don't panic - Gaffney Cline Weekly Recap21 Mar 2020 10:53
Crude Oil – Fear not the oil price war
The oil industry keeps getting worse and it is now facing the weakest oil price since February 2002. The coronavirus pandemic has caused global travel to collapse, eating into the world's once-insatiable thirst for oil, which powers the economy. Countless flights canceled. The cruise industry is at a standstill. Highways are empty and many factories are dark.
Demand for exports from the US Gulf Coast will collapse. US exports had steadily increased in the last four years to more than 4 million barrels per day, but that is certainly to end with the flood of cheaper Saudi oil. Refiners in trouble, exporters in trouble, producers in trouble. This situation calls for very fast and brutal action by the US energy industry.
A lack of options for storage, as well as rising freight costs as Saudi Arabia ramps up shipments, are making for a difficult market. Saudi Arabia’s Bahri shipping unit has booked up to 40 tankers, some of which are for storage. Tanks in Cushing, Oklahoma, one of the biggest storage hubs in the world and the delivery point for benchmark US crude futures, are expected to fill to capacity as early as May.
Yes, the oil market is crashing but this is not the time to be scared away from oil. Oil is not just a number on your screen, but a physical commodity that consumers will buy with cheap prices. With Saudi Arabia offering large discounts, it will not just be speculators buying. Chinese refiners and the Chinese government, as well as other importers, will take advantage to purchase large amounts of physical oil for refining or storage.
Low oil prices over the next few months will function essentially as a stimulus for a struggling Chinese economy that has started their recovery from the Covid-19 virus and will show as higher demand numbers, most likely in early May. The current drop in oil price is unrelated to long-term structural weakness like peak oil demand, alternative energy technologies, or rising electric-vehicle use. Peak demand is a theory that may prove true someday, but it is no more likely today than it was at the start of 2020.
The events that caused extremely low oil prices are based solely on factors that will self-correct eventually. There is plenty of fear in the world today and oil price should not be on the top.
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