Will oil price rebound Under negotiation between powers? 3 mins to understand the trend of oil price

Since the outbreak of the COVID-19 virus in late January 2020, global demand for crude oil and oil products has fallen sharply due to the pandemic, possibly by 3% or more. Under this situation, oil prices have plummeted. In the face of falling demand, Saudi Arabia tried to persuade OPEC to cut production by 1.5 million barrel/day, provided Russia followed suit. However, it was rejected by Russia. Companies in Russia did not want to miss out on cash flow and lose the market. After Russia refused to join the cut plan, Saudi Arabia announced over the weekend of March 7-8, 2020 that it would increase crude oil production and cut prices sharply.

Financial industry has suffered a heavy blow.In particular, both the ruble and the rial depreciated. Forex traders who bought those two currencies had suffered serious losses. Crude oil is a basic raw material for macro economy. The surplus of crude oil means that the economic development is in a declining trend.

Furthermore, falling oil prices will affect the economy through three main channels.

1: A fall in oil prices could widen credit spreads on US high-yield bonds and raise the risk of default. Also, the sharp fall in oil prices has led to forced liquidations and local liquidity risks. Moreover, the proportion of commodities allocated by financial institutions has fallen sharply, and the collapse in oil prices could trigger the spread of panic.

2: The falling oil prices could trigger deflation. The direct impact is to hold down the cost of petroleum consumer goods, and the indirect impact is to lower PPI and CPI by suppressing production costs.

3: The sharp fall in oil prices has led to the redistribution of global income. One result is that global income will be transferred from oil exporting countries to oil importing countries. The income of oil exporting countries will thus decrease, further leading to a decline of demand in importing countries and withdrawal of funds.

Looking ahead, there are three factors affecting oil prices which investors need to pay attention to.

1: The development of the global COVID-19 epidemic. If the epidemic could not be controlled on the global scale and continues for a long time, the oil producers could not get demand of oil from the supplies side and the demand side, which ultimately leads to a decline in global oil demand.

2: The negotiations between major oil-producing countries. Trapped by domestic political and economic pressure, Russia is unwilling to compromise on productions cuts and has declared that it can withstand oil prices at 25-30 dollars per barrel for 6-10 years. However, after negotiations broke down, the ruble immediately depreciated 9.5% against the US dollar. Therefore, the oil prices also depend on the attitudes of countries and how they weigh the economic pros and cons.

3: Attitudes of other oil-producing countries.

Saudi Arabia and Russia are in a tit-for-tat at this moment, while other oil-producing countries have also issued production expectations, which could trigger an oil price war if other major oil-producing countries join in.

The influence of oil slump in other industries.

1: Transportation:

Fuel costs account for 30% of airlines total cost. When the fuel costs are down, that is good for airline companies. But, according to the International Air Transport Association data: the airline industry could lose 63-113 million dollars due to the epidemic. There are many airline companies facing bankruptcy, so the oil demand declines sharply. The surplus of crude oil means that the economical development is trend to negative.

2: New energy industry.

At present, new energy is being developed all over the world. In order to find the alternative clean energy, the developed countries led by OECD pay more and more attention to energy efficiency. The fall in crude oil price will have a certain containment effect on the development of new energy.

3: Petrochemical industry.

The costs of petrochemical-related raw materials will go down, which is beneficial to producers of plastics, rubber, tires and so on in the downstream chemical industry chain.

Declaration:

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3: The editor will review it again before the article is published.

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