Oil Price Crash Impacts Demand Outlook

(Global) Low-price Environment Unsettles Investors

Oil prices plunged sharply over the weekend, falling to just over US$33 a barrel, as the world’s top exporters failed to reach agreement to cut production.

The sharp fall in oil prices has pushed stocks lower, creating volatility for the markets, and threatening medium-term demand in the breakbulk sector as investors weigh up delays or cancellations to major projects.

With many commentators now predicting a global recession as a result of the ongoing coronavirus outbreak, the outlook for the energy sector remains bleak.

“The coronavirus crisis is affecting a wide range of energy markets – including coal, gas and renewables – but its impact on oil markets is particularly severe because it is stopping people and goods from moving around, dealing a heavy blow to demand for transport fuels,” said Fatih Birol, IEA’s executive director.

Increased Pressure

Analysts had hoped that much of the damage from coronavirus had already been priced in last week but markets opened down on Monday as capital fled the oil sector. For many breakbulk operators this is likely to mean heavy delays or lost trade as projects awaiting final investment decisions are abandoned.

"Markets have been shaken by the threat of a price war between OPEC and its main ally, Russia. With markets fluctuating like crazy as the coronavirus takes its financial toll on global economies, and oil prices at unpredictable lows, for us this marks the beginning of a recession,” said Kerstin Braun, president of Stenn Group.

The failure of Russia and Saudi Arabia to reach agreement at a landmark OPEC summit last week has unsettled markets with predictions now of further price declines as Saudi Arabia plans to increase production.

Low-price Environment

The move is seen as a response to states with higher cost of production, such as Russia and the U.S., and likely to put the squeeze on projects with a higher break-even point.

As a result, many more speculative oil and gas projects tare now likely to be postponed as they become unsustainable in a low oil price regime.

“If a true price war ensues, there will be plenty of pain in the oil markets. Many will be bracing for the economic and geopolitical shocks of a low-price environment," said Badr Jafar, president of UAE oil firm Crescent Petroleum.