In a major single-day crash, oil benchmark Brent crude fell 31% after the world's biggest oil exporter Saudi Arabia launched an oil price war with Russia, by slashing prices and preparing for a big increase in crude production in April.
This came days after Organisation of the Petroleum Exporting Countries (OPEC) & its allies failed to reach an agreement on production cuts, in a move to stabilise oil markets amid fall in oil demand due to the virus outbreak.
Saudi Arabia reportedly prepares to increase its crude production above 10 million barrels per day (bpd) in April, after the current deal to curb production expires at the end of March. Global crude prices tanked after Saudi Arabia on Monday cut its price for April delivery by $4-6 a barrel to Asia and $7 to the United States.
Following Saudi's announcement, Brent crude futures fell by as much as $14.25, or 31.5%, to $31.02 per barrel, their lowest since February 12, 2016. The international benchmark dropped from $45 a barrel to $31.52 a barrel, its biggest one-day drop in history.
The share price of Saudi Amarco also fell below its IPO price on Monday. The drop in the share value of the world's biggest IPO followed global shockwaves in financial markets today.
Sugandha Sachdeva VP-Metals, Energy & Currency Research, Religare Broking said, "The accelerating coronavirus outbreak which has sapped oil demand had already hammered down crude oil prices this year. Adding to the pain, Russia's disapproval to deepen oil output cuts and Saudi Arabia plans to flood the markets with oil, triggering an all-out price war, has led to a carnage in oil prices."
Goldman Sachs slashes oil forecast to $20/bbl
Over the sudden price gain of the oil benchmark, Goldman Sachs cut its second and third quarter Brent forecast to $30 a barrel on Sunday and warned there could be dips to $20 a barrel in the coming weeks.
Goldman Sachs analyst Damien Courvalin said in a note on Sunday,"We believe the OPEC and Russia oil price war unequivocally started this weekend when Saudi Arabia aggressively cut the relative price at which it sells its crude by the most in at least 20 years".
"The prognosis for the oil market is even more dire than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus," the firm added.
One of the most influential banks in commodity markets has also expected the global demand for the year to contract by 150,000 barrels per day, on account of the economic slowdown caused by the virus outbreak.
Suman Chowdhury, President - Ratings at Acuite Ratings & Research said,"The sharp decline in the global oil prices not only reflects the deep underlying concerns on a global economic disruption brought about by the Corona Virus scare but also a lack of consensus among the OPEC nations regarding production cuts."
Impact on Indian Economy
The sudden drop in crude prices will be highly beneficial for India that imports 84% of its oil requirements, with nearly 60% of them imported from the Middle East, suggest market analysts.
Suman Chowdhury, President - Ratings at Acuite Ratings & Research said," Since India is one of the largest importers of crude oil, we estimate the savings on oil imports to be around $30 billion in FY21 if there is no significant uptick in global demand. This will also arrest rising inflation and facilitate the next round of rate cuts by RBI."
The sharp decline in global crude oil prices over the past few weeks is positive for India, Kotak Institutional Equities Research said in its Daily note, adding that,"Retail prices of gasoline and diesel may fall sharply over the next few weeks as oil companies cut retail prices to pass on the decline in crude oil prices".
As per the research firm, India is largely unscathed by Covid-19 (so far) and lower crude oil prices provide buffer to the Indian economy. Amid heightened fears of an all-out price war, higher crude discounts and lower fuel and loss will provide some respite to Indian refiners, it added. The brokerage also gave 'BUY' raing for 'Oil, Gas & Consumable Fuels'.
Oil price cut by Saudi Arabia will have a beneficial impact on companies from Tyre, synthetic fibre producers and industries like paints, producers of lubricants, transformer oils, plastic products, soaps and detergents, that depend on crude oil prices as their primary raw material.
Rusmik Oza, Sr. VP (Head of Fundamental Research-PCG) at Kotak Securities said," The sharp fall in crude prices provides buffer to Indian economy. A $5 per barrel decline in oil prices saves India $7-8 billion."
The overall decline in oil prices is on back of falling global demand, led by a sharp increase in the number of Covid-19 cases in Europe, ME and the US over the past 3-4 days.
"The spread of the epidemic, especially outside China, has resulted in lower manufacturing activity on account of factory shutdowns and lower demand for fuel with airlines across cancelling flights randomly, said Karan Shah, Commodity and Currency Analyst, Indiabulls Securities ltd.
In the meanwhile, China's efforts to curtail the coronavirus outbreak have been effective following the sharp decline in new cases. The virus has disrupted the world's second-largest economy and curtailed shipments to the largest oil importer. Even at a contained circumstance, the outbreak has significantly impacted the global oil demand in the short run.
The coronavirus outbreak has hit policymakers worldwide, causing around 3,800 deaths, with the number of infected cases rising to 110,041 today. The number of coronavirus cases in India rose 43 on Monday, which has further weakened sentiment at home.
Outlook in near term
Amid heightened worries over the virus outbreak, most analysts have concluded that the demand for oil is likely to be gloomy.
With the current demand decline for oil, crude prices are expected to remain low until OPEC+ resets oil production again amid mounting fears of a coronavirus-led economic slowdown, suggest commodity analysts.
"The outbreak of coronavirus put break on demand even further thereby pouring water over the efforts of OPEC+," said Karan Shah, Commodity and Currency Analyst, Indiabulls Securities ltd.
" We expect the commodity to be in pressure in the near term. The volatility may be high as the markets may be news-driven and as the global economy still fights the outbreak of the virus. Supports for Brent Oil is seen within a range of $28-$30 while the up move on short-covering may face resistance near $38-$40," added Shah.
Sugandha Sachdeva VP-Metals, Energy & Currency Research, Religare Broking said," Considering this supply shock and sinking demand, the pathway remains bearish going ahead too where after a minor relief rally, prices look to extend their downside toward lows seen in 2016, close to $28 per barrel for Brent crude. A breach of the said level, could even set up the energy counter for a further leg of downside toward $22 per barrel. "