Impact of COVID-19 on Global Crude Oil Market
The crude oil market experienced an unprecedented overreaction in the first half of the pandemic year 2020, and the global crude oil dynamic has shifted significantly over the last decade. The COVID-19 pandemic has disrupted the global supply chain, and the contraction of energy demand has caused global crude oil to fall to historically low levels.
Countries which are net exporters of oil are experiencing an unprecedented double blow a global economic contraction driven by the COVID-19 pandemic and an oil market collapse with the benchmark price for United States crude oil, the West Texas Intermediate, briefly underwent negative for the first time in history in April 2020. On the basis of an oil price of USD 30 per barrel, the International Energy Agency projected that oil and gas revenues for a number of key producers will fall by between 50% to 85% in 2020, compared to 2019, yet the losses could be larger depending on future market developments.
The interruption in negotiations amid the Organization of the Petroleum Exporting Countries (OPEC) and its partners led to what will likely be a tenacious downfall in oil prices. Brent oil prices have collapsed by about 60% since the start of the year 2020, while crude futures in the United States had fallen around 130% to levels well below; this has led to drilling breaks and extreme expenditure cuts.
As the COVID-19 pandemic spread, Saudi Arabia, the world's second-largest oil producer after the United States, urged fellow Organization of Petroleum Exporting Countries (OPEC) members and Russia to cut production. After forming an alliance with OPEC in 2016 to control the price of oil through production cuts, Russia, the world's third-largest oil producer, resisted the call for further cuts in response to the pandemic and sought to gain market share in anticipation that the profitability and output of the United States' major assets would fall in the face of lower prices.
Saudi Arabia, along with OPEC members- Iraq and the United Arab Emirates, had begun to reverse production cuts. By the beginning of April 2020, Saudi Arabia alone reached a record production of 12.3 million barrels per day, an output exceeding the pre-pandemic consumption levels of Japan, Germany, France, the United Kingdom, Italy, and Spain combined. The production surge coincided with an International Energy Agency (IEA) estimate that global demand for oil was down by nearly 30 million barrels per day due to the COVID-19 pandemic-related shutdowns. With demand down, adding petroleum to an already saturated market resulted in a near-record level of 535.2 million barrels of crude petroleum stockpiles in the United States in May 2020.
Following a sharp drop in the early months of the pandemic, crude petroleum prices began to rise at the end of April 2020. Producer prices for crude petroleum recovered partially from April to June, and import prices recovered similarly from April to July. The price rise began with a decrease in supply, with a positive shock to demand eventually contributing as well.
World petroleum demand is expected to fall from 2019 levels in both 2020 and 2021. One factor boosting demand expectations is China's commitment to increase petroleum imports from the United States as part of a trade agreement—a sign of continued demand recovery in the Asian country. The industry's major drivers, such as rising population, expanding automobile industry, rising demand from Asia Pacific, and rising number of oil reserves, are expected to aid market growth.
The resurgent rate of virus spread appears to have dampened optimism about the mass rollout of coronavirus vaccines in recent weeks. It has resulted in oil producers trying to orchestrate a delicate balancing act between supply and demand as factors including the pace of the pandemic response continue to cloud the outlook.
The 13-member group estimated that global oil demand would rise by 5.9 million barrels per day in 2021 to average 95.9 million barrels per day.
China, the world's largest crude importer, has seen an increase in COVID-19 cases as well. Furthermore, despite an expected rise in refining rates in the second half, Beijing's crackdown on the misuse of import quotas, combined with the impact of high crude prices, could cause China's oil import growth to be the slowest in two decades this year.
Despite a decision by the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, to increase production for the rest of the year, global oil markets are expected to remain insufficient.
To create fiscal space in oil-exporting developing countries, reduce the risks of unsustainable debt, corruption, and illicit financial flows (IFFs), and catalyse a transition to a cleaner and more sustainable future, a timely and coherent response involving both concessional lenders and private financiers is required.