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The plummet in oil price: How and why?

The plummet in oil price: How and why?

Wednesday 01, 04 2020
From the beginning of the year until now, the oil price has plummeted. The questions here is how it has done so, and why.

According to the report of Dr. Can Van Luc and the authors of BIDV Training and Research Institute published recently, from the beginning of 2020, until now, the global oil price has dropped by more than 60%, resulting in both negative and positive effects on the global economy, in which major oil-producing countries such as Russia, Arabia Saudi, Venezuela, Iraq, etc. have been severely affected; meanwhile, the majority of other countries are enjoying the benefits of this due to the low input cost.

For Vietnam, the decreased global oil price contributes to the production cost reduction of enterprises and consumers, thus stimulating investment and consumption, while simultaneously saving loads of foreign currencies used to import gas and oil, supporting inflation control, and stabilizing the microeconomy.

However, the decrease in oil price has also affected the State budget revenue, investment activities, petrochemical exploitation, and filtering. In 2020, the oil price is estimated to be at a low level, affecting the Vietnamese economy at a certain level.

The global oil price developments in 2019 and the first quarter of 2020

In 2019, the global oil price skyrocketed with a Large fluctuation range due to concerns about the instabilities of the global geopolitics, the America-China trade tension, along with the movements of OPEC nations.

The oil price had strong fluctuations as after peaking at the end of April (increasing by 30% compared to the beginning of the year), it dropped by 20%; then it fluctuated with a wide band until the end of the year.

In 2019, the average oil price was at 60.62 USD/barrel, in which the oil prices (Brent and WTI) increased by approximately 12% over the beginning of the year, and closed on 31st December 2019 at USD 66 and USD 61.07 / barrel respectively. In the report on January 2020, IMF estimated that the average Brent and WTI oil prices in 2020 and 2021 would drop by 4.3% and 4.7%, respectively; the average oil price would be at 58 USD in 2020 and 55.3 USD/barrel in 2021, respectively.

However, from the beginning of 2020, after the COVID-19 epidemic started in China, especially from the middle of February when the disease became widespread and complicated, the oil price has plummeted by 65% compared to the beginning of the year, including several drops of 20%. On 31st March, the crude oil price (Brent and WTI) was at the lowest level in the last 18 years, equivalent to 23.06 USD and 20.8 USD/barrel, decreasing sharply compared to the peak on 6th January 2020 (of 68.91 USD and 63.05 USD/barrel), due to the drops in both supply and demand.

Regarding the demand, the COVID-19 has spread all over the world and has been negatively affecting different economies, as well as the regional and global economy;
​it may even lead to an economic depression, in which several major economies are at risk of facing depression or severe growth rate reduction.

According to the basic scenario of Citi Research on 27th March 2020, the global economy will face depression, the growth rate will drop by 1.6% in 2020, in which the GDP growth of China and Korea will be at only 2.4% and 0.3%, respectively. 

That of America, Japan, and the EU will drop by 1.6%, 0.5%, and 8.4%, respectively. Some recent estimations have warned that the global economic depression risks in 2020 are quite vivid, therefore the global GDP growth rate will be even lower. As a result, the general global goods demand, including that of oil, has dropped sharply.

The plummet in oil price: How and why?

Regarding the supply, OPEC+ (including OPEC and Union countries that export oil) and Russia did not agree on the reduction of the oil exploitation (which will end on 31st March 2020), as Russia turned down further reduction suggestions, raising the concerns that the oil supply will increase after 31st Marc, as countries eliminate their production limits.

Besides the two main aforementioned reasons, the oil price reduction from the beginning of 2020 until now is also due to 3 others:

  • From the beginning of the year, the USD has increased in price by around 3% comparing to that of most other major currencies, creating goods decline reduction, in which the crude oil price is calculated in USD.

  • OPEC countries, Russia, and America use the oil price as an indirect economic sanction on each other (due to the facts that the capital cost and oil production cost of each nation are different and the energy industry is the backbone of these nations);

  • The crude oil exploitation cost continues to drop due to the application of new technologies and cost savings. Currently, the average crude oil exploitation cost of major oil-producing countries is all lower than 40 USD/barrel. For example, Kuwait is a country with the lowest oil production cost, with only 8.5 USD/barrel, followed by Saudi Arabic with 9.9 USD/barrel, Iraq with 10.7 USD/barrel, UAE with 12.3 USD/barrel, and Iran with 12.6USD/barrel, etc.

Oil price forecast in 2020

In January 2020, the global economy was expected to recover as the tension between America and China lessened and the two countries signed a first-phase agreement.

However, the COVID-19 starting in China and spreading globally has negatively affected the socioeconomic situation of most nations. On 11th March 2020, WHO officially declared COVID-19 a pandemic and many countries have also declared national emergency.

Until now, the epidemic is still developing complicatedly and uncontrollably, wreaking havoc in Europe, America, and ASEAN, affecting the global socio-economic situation, possibly making the global and several national economies face an economic reduction or even a depression.

Governments and central banks of several nations have issued billions USD of aid packages, implementing monetary loosening policies (such as reducing the fundamental interest rate, the compulsory reserve rate, the rediscount interest rate, or increasing the favorable loans, etc.) to support enterprises and business households in the context of the epidemic.

Regarding the oil price by the end of 2020, most international organizations rely on a few expectations:

  • The supply continues to increase due to OPEC countries and Russia failing to reach an agreement, while the demand plummeted to the gloomy global economic prospects.

  • The increasing risks force investors to find safe havens, including the American treasury bonds and the USD; thus, the USD is expected to continue to increase in price compared to other strong currencies.

As analyzed above, currently the oil price is facing double pressures in both the dropping demand and the increasing supply; as a result, the oil price is forecasted to continue to fall and stay at a low level.

According to the estimation of Morgan Stanley, Goldman Sachs, and Citi Research last week, the global oil price in the 2nd and 3rd quarter of the year will be at only 25-30 USD/barrel, and the oil supply may face a redundancy of approximately 3.5 million barrels/day in 2020.

According to Bloomberg’s survey conducted in the middle of March 2020, 90% oil and oil product traders think that the Brent oil price will drop to 20 USD/barrel in the middle of April 2020 (and the WTI oil price will be 3-5 USD/barrel lower than the price of the Brent oil); it will remain at the lowest level in several weeks, or even months, in 2020. Meanwhile, Energy Aspects (in March 2020) forecasted that the 2020 average price of the Brent oil would be at 20 USD/barrel.

>> Oil and Gas decreases, VN-Index reverses more than 3 points


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