78彩票网appThe oil market has been exceptionally dramatic and eventful over the last week. A combination of fundamentals along with misinformation has led to heightened volatility and a collapse in oil prices.
78彩票网appBut the current market narrative is deceptive. Below, are the real, crucial issues for traders. Here's what transpired and what's actually driving market instability right now:
78彩票网appFor most of last year, the market has been obsessed with the prospect of a global economic slowdown and fear of diminishing demand growth. The emergence of coronavirus only exacerbated these concerns further and introduced the prospect of a decline in oil demand in 2020.
It was that China—ground zero for the pandemic and thus far hardest hit by the coronavirus—reduced the cargoes of oil it would buy from West African oil suppliers and from Saudi Arabia. The prospect of lower demand, especially from China, stoked market worries and oil prices78彩票网app started to drop.
At its meeting last week, OPEC reacted by floating a production cut, designed to decrease supply enough to counteract lower demand and stabilize the market. Russian support for a production cut was necessary since OPEC was working with non-OPEC members within the OPEC+ framework.
Because Russia, China’s second-largest oil supplier, hadn't seen a reduction in its sales to China, the European nation didn't believe there was a reason to cut its own production to satisfy OPEC’s desires. When presented with a plan on Friday, Russia, acted in its own self-interest by , seemingly splitting OPEC+ in the process.
78彩票网appOver the weekend, news emerged that Saudi Arabia was both offering oil at significantly to customers—primarily in Asia—and increasing its available supply to 12.3 million barrels per day. These actions enerved the market, making it Saudi Arabia was starting a with Russia.
78彩票网appIn reality, a price war means attacks come from both directions: the next salvo would have to come from Russia, then Saudi Arabia, then Russia, etc. That hasn't happened yet. The market was so anxious about a potential price war, that when international exchanges opened at the start of the week, oil prices over 30%.
78彩票网appRussia responded to the Saudi move by saying it would its production (not necessarily decrease prices) and that it, if necessary, was to use its $150 sovereign wealth fund to support the economy and cover budget losses. On Tuesday, Saudi Arabia announced it was to supply up to 12 million bpd.
78彩票网appThis was a big deal. That number meant Saudi Arabia would be using up its spare capacity.
However, on Wednesday the Kingdom clarified that it would its government-mandated capacity to 13 million bpd, immediately setting off alarm bells since there was a misunderstanding about what Saudi Arabia meant by increasing its capacity. The market seemed to believe that this indicated additional production.
While that wasn't the case, for traders, what the market thinks78彩票网app is key. And right now, the market is scared of a price war.
So far, events do not confirm that Saudi Arabia and are in a price war, but we will eventually see if Russia is going to lower its prices below Saudi Arabia’s.
78彩票网appWhat we have now are two out of the three biggest producers in the world flooding the market with cheap oil. They are very likely looking to raise in hopes prices will stabilize.
78彩票网appMeanwhile, the market seems convinced that we have a price war, and that is why it’s so skittish. The instability and the threat of big drops will continue as long as this narrative persists. An actual price war could last months or years, but if Saudi Arabia and Russia instead succeed at shocking oil demand back to life, we could see stabilization at least when demand numbers come out in early May.
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