Follow-Up on Oil War & European Prevention Efforts

UPDATE: European Stage of the Coronavirus Epidemic

Italy has surpassed China in total deaths at nearly 5,500, making it the new epicenter of the virus. The entire country is completely shut down and off limits, and any movement within the country has even been restricted. Over the course of the last week we have seen lots of development in the variety of restrictions which European countries are putting in place to combat the spread of the virus.

• No public gatherings of more than two people in Germany
• Amazon halts shipping of non-essentials in France and Italy
• National order for hotel closures in Spain
• Italy forces closure of all non-essential businesses
• European Union border closures

Saudi Arabia Losing Grasp on Oil Market

Back in early February when COVID-19 was largely thought of as a “Chinese Issue”, oil had already dropped 15%, hitting a one year low. To keep the price of oil from tumbling further, the OPEC nations decided on production cuts, but these would not work unless Russia were to comply with cuts as well. The OPEC countries and Russia were never able to strike a deal; it was originally proposed that Russia would cut 600,000 barrels each day, but the Kremlin would not be happy settling for an 8% cut in output.

This leaves us today. Since the inability to reach reach an agreement, Saudi Arabia has been offered their buyers incredible discounts for the month of April, and this move is likely to be seen from the other gulf states as well. This rampant sell-a-thon would have been sustainable for growth at $40 USD / barrel, but now that Brent barrels are $30 a barrel, the mass injection into the supply chain is only going to hurt Saudi Arabia in the months and potentially next few years to come.

Due to the Coronavirus slide in price, the Kingdom proposed a 20-30% cut in budgets, and according to Fitch Ratings, prices would need to be upwards of $90 per barrel for the country to have a balanced budget in 2020 all else remaining equal. It is also estimated that for each $10 USD dip in price, revenues are affected by 2-3% of GDP. Amin H. Nasser, CEO and President of Aramco, has stated that a business continuity plan has been put in place to maintain output during the Coronavirus, but only time will tell as we look to analyze the severity and volume of the current recession.