Tags: Financial Markets | Russia | Venezuela | saudis | opec

Coronavirus, Other Events Means Oil Drop, But for How Long?

coronavirus and oil price drop for now

By Thursday, 02 April 2020 02:58 PM Current | Bio | Archive

One of the most positive and unforeseen consequences of COVID-19 is a drop in oil prices across the global market.

A drop that, much like the coronavirus, reverberates around the world.

Oil prices began falling before the world knew of COVID-19.

OPEC’s inability to rein in Saudi Arabia, an OPEC member, coupled with their inability to rein in Russia, a friend of OPEC but not a member, helps explain this continuing downward trend.

During the most recent OPEC meeting, held in March, there was a failed attempt to lower output in order to try to drive up oil prices. But no agreement was reached.

When the deadline for capped oil output by the members expired, the Saudis and the Russians independently decided to flood the oil market, a move that will even further drive down the price of oil.

Is it possible that they colluded, deciding to make the move together and to keep it a secret?

Of course it is.

But that is something we'll never know. Suffice it to say, they "went rogue."

They took a critical step.

When the price of oil goes down, the biggest suppliers make the biggest profits in the long term. When that happens, big suppliers often drive out their smaller competition who can’t afford to produce.

Coronavirus is keeping us at home.

Not just in the United States: everywhere and everywhere includes Europe, Asia, and the Mideast.

That means fewer people are driving and less gas is being pumped. Demand has dropped making the price drop. I filled up my tank with gas this week, you won’t believe this, for $1.50 a gallon

There is another variable to add to the equation.

Russia and Saudi Arabia are, respectively, the # 2 and # 3 top oil producers in the world. The # 1 producer of oil since 2017 is the United States of America. The U.S. became the largest oil producer in the world because of shale. Shale is oil that is produced from sedimentary rock. And there can be no doubt that the primary motivation for the United States to enter the oil market through the conversion of shale to oil was to drive down the price of oil.

The secondary motivation – and a strong contender for first, was to relocate the center of oil supply from the Mideast. The move served to stabilize a very unstable, price fluctuating market, one that would rise and fall depending on the mood in the region.

The United States now controls 15.5% of the world’s market share of oil sales while Russia controls 13% and Saudi Arabia controls12%. Take a moment to digest that information. It is hardly conventional wisdom.

Conventional wisdom would have it that the Saudis and the Gulf States are the world’s major oil producers and way down the list would be Russia and the United States and then, maybe, Venezuela . In reality, however, the model is inverted. The list goes United States, Russia, Saudi Arabia.

According to experts on Saudi Arabian and Russian oil production, this drive to flood the global oil market will continue through May until June or July. Three months is equivalent to one quarter of an annual financial report.

From January of 2020 through April1st, the first economicquarter of 2020, the price of oil dropped more than 60%. This is a price war. And this price war is great for the consumer. The only down side is that most of us are unable to avail ourselves of this bonus in gas prices because we are at home.

The price of oil is hovering just above $20 per barrel. That’s an 18-year low. The breakeven point is when it is no longer profitable to produce oil, when it costs more to pull the barrel of oil out of the ground than the price of the sale of that oil.

For most oil companies that point hovers between $25 to $35 per barrel. For American companies producing shale that number begins at $35 per barrel.

One would expect production to slow down so that prices go up. But that’s not the case. Russia and Saudi Arabia want to squeeze out the United States, their main competitor, where the breakeven point for shale is much higher than their breakeven point for oil. If Russia and Saudi Arabia have their way, it will slash U.S. oil production.

Only 12 shale companies can continue to produce when the price drops below $35 because it costs more to produce oil from shale.

The dramatically low price per barrel price is slowly making its way to pumps.

The salient point here is that because of the confluence of several events — including COVID-19 the price of oil and by extension gasoline may continue to drop.

That's good for us in the short term.

But Russia and Saudi Arabia are using world events to destroy the United States, their nemesis and their biggest competition, and they will force the price of oil up and up in the long run.

These countries are interested in destroying U.S. oil competition, not in aiding humanity.

Stay well. Stay safe.

Micah Halpern is a political and foreign affairs commentator. He founded "The Micah Report" and hosts "Thinking Out Loud with Micah Halpern" a weekly TV program and "My Chopp" a daily radio spot. A dynamic speaker, he specializes in analyzing world events and evaluating their relevance and impact. Follow him on Twitter @MicahHalpern. To read more of this reports — Click Here Now.

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One would expect production to slow down so that prices go up. But that’s not the case. Russia and Saudi Arabia want to squeeze out the United States, their main competitor, where the breakeven point for shale is much higher than their breakeven point for oil.
saudis, opec
Thursday, 02 April 2020 02:58 PM
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