Oil market mirroring 2008

Global crude oil is having its worst bear run since 2008. Coronavirus (Covid-19) is a very real threat. No matter how hyped up it may or may not be, the consequences are far reaching. What was already shaping up a disastrous run for oil prices, turned nightmarish as the Opec Plus deal hit snags when Russia decided it has had enough with supply cut agreements.

Last Friday saw Brent and WTI crude oil fall by 10 percent in a single-day – the biggest single-day drop since the dark days of 2008. The memories of 2008 are still fresh in some minds, and the parallels should not be outrightly rejected as overhyped fears. The extent of global GDP growth loss is anyone’s guess, but the Covid-19 surely has triggered a commodity market collapse last seen in 2008.

The likes of McKinsey have put down the initial estimate of lobal GDP loss at 0.7 percent – which is a big deal. The situation is fluid and the projections will keep varying as coronavirus has spread its wings to all continents. The Opec Vienna meeting was being tipped as the most vital cog to keep oil prices from falling further.

Russia’s refusal to continue agreeing to deeper cuts, has come as a surprise, primarily because it has been a very active player in the Opec Plus group for three years. Russia had also shown immense compliance to production freeze and cuts, almost in line with Saudi Arabia. Russia may well have put it down to biding more time to better assess the Coronavirus impact on global oil demand.

Some circles have it that Russia has had enough of US shale players making merry at the cost of Opec plus players. From April 1 onwards, the oil supply will be down to “for each her own.” Russia would not mind keeping US shale producers at a disadvantage by pumping more and more oil in the system, at a time when global demand has fallen, and is expected to fall further, creating a supply glut of the highest order.

Some in the market are fearing that crude could be pushed down to as low as $30/bbl. A few months ago, this would have sounded outlandish. But right now, it seems a near-term possibility. On the other hand, Covid-19 is not expected to add a permanent risk premium to the prices, unlike the previous instances. For Pakistan, it is obviously good news on inflation, revenue, and current account fronts. Enjoy whilst it lasts.