How Low Can Oil Go?

2020 hasn't been pretty for the oil and gas sector, with prices for international benchmark Brent crude averaging US$33 per barrel. This represents the lowest levels seen in four years and is around half of the 2019 average. US shale isn't performing any better, with WTI crude slipping below US$20.

By the end of the year, the Energy Information Administration (EIA) predicts US oil production will slump to 11.8 million barrels per day. In 2021 production will drop even further to 11 million barrels per day. The drastic cuts are a key part of America's plan to increase demand in the wake of the COVID-19 pandemic, which has crippled economies around the world.

Russia and Saudi Arabia enter oil price war

One of the biggest drivers of the oil price crash is an escalating trade war between Russia and Saudi Arabia. On March 8 the two oil-rich nations clashed over proposed production cuts designed to support the market in the wake of the COVID-19 pandemic. Due to a drastic drop in demand caused by static economies in nations such as China, oil prices had already plummeted by 30% since the start of 2020. After failing to reach a consensus, Russia and Saudi Arabia, along with other OPEC members, entered a price war that saw US oil prices plunge by 34%. Crude fell by 26% and Brent dropped by 24%.

The most dismal forecasts warn that while oil prices have already dropped about 60% this year the worst is yet to come. Predictions of less than US$20 a barrel for Brent crude were released by a recent survey of traders published by Bloomberg. Other analysts speculate regional prices could eventually slip into negative territory in a bid to tackle the supply glut. 

EIA, Bank of America predicts light at the end of the tunnel

While 2020 has ushered in dark times for oil, the EIA is hopeful prices will recover to around US$46 per barrel in 2021. To help oil prices recover and to ensure cooperation from Russia and Saudi Arabia, President Trump has threatened to slap "substantial tariffs" on both countries if they don't resolve their oil price war and work to bolster the market.

Bank of America is cautiously optimistic, saying "The oil market expects these massive supply and demand shocks to fade within 3 to 4 months, a plausible outcome." While stabilisation within a matter of months is possible, the Bank of America adds, "However, if either shock (or both) last for 12 months or longer, the gigantic surplus could keep oil prices below $30/bbl for an extended period."

Want to know more about how COVID-19 is affecting the global oil and gas market? Don't miss 'The Only Certainty is Uncertainty for Corona-Stricken Oil Industry' for insight from Dr. Raj Shah, David Phillips and Ms. Shana Braff on behalf of Koehler Instrument Company.