Falling Crude Prices Will Hurt Developing Country Oil Producers

Oil and gas income for developing countries will plunge if current weak crude prices persist, the International Energy Agency and The Organization of the Petroleum Exporting Countries said in a rare joint statement.

IEA Executive Director Fatih Birol and OPEC Secretary General Mohammed Barkindo said they expect oil and gas income in the developing countries to drop by 50% to 85% in 2020.

Crude oil prices have been cut by more than half since a recent peak in January due to falling demand as a result of the coronavirus epidemic, but also due to a devastating price war between Russia and Saudi Arabia.

As of 1:40 p.m. EDT on Tuesday, international benchmark Brent crude traded at $29.52 per barrel, while U.S. West Texas Intermediate, or WTI, was priced at $28.26.

Birol and Barkindo also expressed their “deep concerns” about the coronavirus pandemic, warning it could lead to “potentially far-reaching economic and social consequences.”

“This is likely to have major social and economic consequences, notably for public sector spending in vital areas such as healthcare and education,” IEA and OPEC said of continuing low crude prices.

Birol recently singled out countries like Iraq, Algeria and Nigeria — all of whom are OPEC producers — as being in a “very, very difficult situation” and that they will likely need support from the rest of the world.

Iraq, OPEC’s second-largest producer behind Saudi Arabia, is especially vulnerable to low oil prices since their economy is not sufficiently diversified to withstand oil price weakness.

Pricing pressures on oil are likely to intensify.

On Monday, Saudi Arabia’s state-owned oil company Saudi Aramco said it plans to boost output in April and into May. Aramco officials also said they were “very comfortable” with crude oil prices of $30 a barrel and will remain so “for a long time.”

Russia, which earlier rejected a proposal by OPEC to reduce output, has said it can tolerate low oil prices for as long as a decade.

Some analysts expect oil prices to sink to the teens in the next few weeks.

“Oil could easily be in the teens at the bottom -- could even be low teens at the lowest,” said Abhi Rajendran, director of research at Energy Intelligence, on Monday. “The main driver is for, a week or two, we could have global market oversupply of over 10 million barrels per day -- which is insane and unprecedented.”

Jim Burkhard, vice president and head of oil markets at IHS Markit, noted that “the last time there was a global surplus of this magnitude was never.”

Burkhard forecasts that oil demand will shrink by up to 10 million bpd for March and April.

“Prior to this, the largest six-month global surplus this century was 360 million barrels. What is coming will be twice that or more,” he added.

Oil analysts dread the arrival of Apr. 1 when a prior OPEC deal to cut production expires, freeing Saudi Arabia to escalate its output.

The Saudis plan to upgrade daily production to 12.3 million bpd in April, up from about 9.7 million bpd in February.

Last week, Russia’s energy minister Alexander Novak said Moscow can increase its output by 200,000 to 300,000 bpd in the short term, and 500,000 bpd in the longer term.

“In the coming weeks, with no Saudi-Russia discourse, oil is likely [to be] in the teens,” Rajendran added. “With that sort of dislocation and barrage of overseas supply, WTI-Brent could be equal or flip negative for a brief period,” referring to the fact that WTI usually trades between $5 to $10 per barrel below Brent.

“Demand dislocation is unprecedented,” he said. “Everyone is shutting down, especially in the U.S.”

With airlines drastically cutting services and companies and factories around the globe temporarily closing, oil prices may keep dropping.

Kang Wu, head of analytics for S&P Global Platts, warned that “the overall supply-demand [picture] doesn’t suggest that it will stop there, because we still haven’t seen the worst yet. April will be the official time that without the production cut agreement, OPEC members -- everyone, Russia included, OPEC-plus -- are free to produce more. [Large] volumes will hit the market.”

Tamas Varga, an oil analyst at PVM Oil Associates in London, similarly warned that: “Given the resilience of COVID-19 and the stubbornness of Russia and Saudi Arabia to give concessions such a move [below $30 per barrel] is likely to happen. It could actually get worse. Under the current circumstances, oil could fall even below [$20] and stock markets could easily shed another 30%-40% of their values.”

On Tuesday, Goldman Sachs slashed its oil forecast for WTI to $22 per barrel in the second quarter with Brent crude at $20 per barrel – down from its most recent forecasts of $29 and $30, respectively.

“Demand losses across the [oil] complex are now unprecedented,” wrote Goldman’s global head of commodities research Jeffrey Currie, adding that oil consumption has dropped by 8 million barrels per day.