The fall in oil prices and the reduced demand for oil come as bad news for oil producing countries and not very good news for oil consumers as well. No one is benefiting from the collapse in oil prices which forced the demand for oil to be reduced by more than 50 percent by some parts of the Western world.
This leaves the oil market in a mess with no hope for a speedy recovery. Let us hope that the situation will last perhaps until the end of this year. Similarly, the world economic situation is facing closures in almost every industrial sector, except for the production of medical and health equipment such as ventilators, masks and other health-related sectors globally. In order to fight the coronavirus pandemic, the world is on a lockdown for the time being. Despite the very cheap cost of oil that every consumer would have enjoyed, they are not allowed to drive and are forced to stay indoors.
This has caused the oil demand to fall by about 26 million barrels or 25 percent less than the global demand. It has forced global refineries to shut down or reduce capacity, resulting in massive layoffs of workers. This will later push the oil sector to cut costs and resort to restructuring, should the situation remain so in the USA and Europe.
Today, USA’s demand for gasoline is down by more than five million barrels per day or 5 percent of the global demand for motor gasoline such that the oil prices will hit close to $16 per barrel for Arabian Gulf oil producers that sell their oil to the USA market if not lower. They will get a return of $20 per barrel for the oils sent to Europe. The demand for oil in Asia is more down considering China with more than four million barrels of consumption is out.
The oil industry is facing new challenges. OPEC too is facing fundamental changes which could lead to spread of weights and power of its members. Certainly, the recent action of forcing more oils into the market will backfire in a big way.
The market will be awash with oils for some years to come, and the current weak demand for oil will remain. The possibility of oil price rising above $ 30 per barrel is low. Pouring and pushing oils into the market didn’t do its trick. Shale oil will continue to stay with us. USA will not let its self-sufficient oil industry to go under. Oil producing countries must balance their budgets with cheap oil price to survive; otherwise they just would not be able to move on. Yet again, this should serve as another reminder that we need to move away from oil. We in Kuwait can do it if we just streamline our population structure.
By Kamel Al-Harami Independent Oil Analyst