To understand the recent oil price crash, it may be useful to rewind the timeline to late 2016. At the time, after two years of depressed prices, OPEC nations and several non-OPEC producers (OPEC+) agreed to limit oil production as part of their efforts to end the global supply glut. Oil prices recovered subsequently.
In late 2018, oil prices dropped as supply outstripped demand and global inventories started to rise. OPEC+ agreed to cut production in December 20181 and oil prices stabilized.
Earlier this year, amid the COVID-19 outbreak and the resulting drop in oil demand, oil prices started to fall again. Globally, airlines cut capacity in February and March, and are expected to continue doing so in the months to come.2 Prior to the virus outbreak, the IEA (International Energy Agency) forecasted 1.2mb/d (million barrels per day) of global oil demand growth for 2020.3 In its March report, the agency expected global oil demand to fall in 2020—the first full-year decline in more than a decade.4
OPEC responded by announcing a plan to extend (current agreement ends at the end of 1Q20) and deepen supply cuts to avoid a sharp sell-off.5 However, the plan fell apart after the organization failed to secure Russia’s commitment. On March 6, Russia announced that it would no longer curtail production beginning in April. This led Saudi Arabia to launch a price war and announce that it would raise production and cut prices.6 As a result, oil prices fell by over 25% on March 9 (see chart below).
What has been the impact on the energy sector globally?
As expected, energy companies suffered from the oil price drop. Energy is by far the worst performing sector in global markets year to date (see chart below). In the U.S., the sector has lost nearly 70% since its bull market high in June 2014.7
Continue reading with full charts here.
