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If prices remain at or below the current levels for any length of time there is potential for a wave of bankruptcies in the US energy sector,while economic woes and social unrest in countries like Iran,Iraq,Venezuela and Angola would intensify.
OPEC+ - a loose alliance between OPEC and key non-OPEC producers led by Russia – had been rolling over agreements to constrain production in order to keep oil prices higher than they might otherwise have been for more than three years. The expanded cartel had taken more than two million barrels a day out of the oil markets.
Those production cuts were a response to the Saudis’ disastrous assault on the US shale oil sector in 2014,when it sought to flood the markets and undermine the US producers'viability before the shale producers could get too large a foothold in the market.
The oil price slumped from well over $US100 a barrel to less than $US40 a barrel,stressing the finances of all the producers,including the Saudis,and OPEC cracked before the shale producers.
The Saudis subsequently organised (and bore the brunt of) the production cuts that were implemented to restore stability to the market.
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The Saudi plan had been to increase and extend the current production constraints,which are due to expire at the end of this month,through to the end of this year. The Russians,however,rejected the proposal,apparently because they believe the only beneficiaries of the production curbs are the American producers.
Russia has been increasingly agitated by American sanctions on its energy sector,its largest source of state revenue. Its decision to walk away from the production restraints presumably says that it believes the US producers are more vulnerable today than they were in 2014.
Demand for oil has been falling as the economic impacts of the coronavirus spread. China is the world’s largest oil importer and the three million barrels a day,or 20 per cent,plunge in its consumption has been the major influence in the accelerating slide in the oil price this year.
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With the effects of the virus continue to spread and impact other major economies and the global supply chains that underpin much industrial activity malfunctioning it perhaps isn’t surprising that the oil price has plummeted or that oil industry analysts are talking about prices around $US20 a barrel that were last seen in the very early 2000s,after the dot com boom collapsed.
The savage price reduction might conventionally be seen as a positive for the global economy,lowering energy costs across economies.
With factories closed or closing around the world,cross-border travel shrivelling,cargo ships idled and fear of the virus mounting and impacting consumer behaviours,however,demand is more likely to fall further than to rise,regardless of the price.
The oil price,when allowed to trade freely,is usually quite an effective barometer of the health of the global economy. At this moment,now that it is trading more freely,it is in freefall and both oil prices and the global economy are looking quite frail.