Despite the flippant title, for many oil traders, and even more so oil producers, the situation in the oil market is fairly serious.
plumbed new lows last night, stopping within a whisker of $20/bbl, levels not seen since before the turn of the millennium. The perfect oil market storm has been brewing since January when China went into lockdown because of the coronavirus; these winds gathered strength with Russia and Saudi Arabia going head-to-head over who should and who wouldn’t curb production to prop up prices and then finally culminated as transport ground to a halt in Europe and is now doing the same thing in parts of the US.
Although plunging oil prices and caused the US president to pick up the phone to his Russian counterpart to persuade him to slow down the amount of oil Russia is exporting, the actual change in prices is not going to come from that quarter. Granted, Tuesday’s news that the two presidents have agreed for their top energy officials to discuss a potential course of action boosted WTI this morning back above $21, and similar news of discussions will do the same going forward, but serious relief from the pressure on oil prices will not come from that direction.
For one, Russia is not a major import partner for the US. The largest amount of oil imported into the US comes from Canada, just under 50%, with the next 7% coming from Mexico. Both Saudi Arabia and Russia only made up 6% each of the total US imports and are almost as important for the US as Colombia.
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The bigger, and faster, the impact for WTI will come from domestic production which is already yielding to the low prices. Last week 40 oil rigs in the US stopped working after 19 were already shuttered the week before. A number of higher cost drillers in the US are teetering on the verge of bankruptcy and further closures are likely to follow like dominoes as the spread of the virus intensifies in the US.
The chart to look at for oil
For a look at where oil is likely to go over the next few weeks the chart to look at will be the John Hopkins University Global Corona Virus Chart (https://coronavirus.jhu.edu/map.html). The progress of the virus is putting a cap on all transport, and transport makes up close to 70% of the US domestic crude oil demand. While there is no national ban on movement, the restrictions across a number of states have already caused demand to drop to a fraction of its normal size. As the virus intensifies the demand picture will only worsen. No amount of talking with Russia will be able to change that over the coming weeks.
