Coronavirus Triggers Crude Crash

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Coronavirus Triggers Crude Crash
Crude oil prices crashed in the wake of the coronavirus this week.

The economic wrecking ball that is the coronavirus went into full swing this week when it sent the price of crude oil back to 1991 and pounded stock markets.

Asian stock exchanges took a beating, as investors pulled money out of commodities in search of safe assets such as the Japanese yen, U.S. bonds and gold. Since the close of last Friday, the Tokyo Stock Exchange’s Nikkei 225 Index lost almost 12 percent of its value, the Australian Stock Exchange’s value declined nearly 10 percent and the Hong Kong Hang Seng index lost 7 percent. In the West, the Dow Jones and Financial Times Stock Exchange 100 lost 18 and 19 percent of their value, respectively, from March 6 to 12. Shares in oil majors such as BP and Shell lost about 20 percent of their value on the London Stock Exchange just on Monday, with some smaller companies losing up to 50 percent, according to the Financial Times.

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As global oil demand has been evaporating lately, mainly from the number-one consumer China, the collapse was hastened by a price war between Saudi Arabia – the world’s largest exporter of crude oil and de facto leader of the Opec cartel – and non-Opec member Russia. Moscow rejected an Opec plan to cut production by 1.5 million barrels per day to shore up prices, and in response the Saudis slashed the cost of its crude.

Brent tumbled 27 percent to $33.22 per barrel and WTI by 24 percent to $31.50 per barrel by Thursday afternoon, and some analysts predicted oil could go even lower to the $20s.

The decline of crude put great downward pressure on base oil prices, according to buyers and sellers.

Even so, the falling crude price may relieve some of the squeeze on base oil margins at a time of overcapacity and lackluster demand. This could give base oil producers a brief opportunity to make hay while the sun shines.

“Refiners should see a short-term gain from the current oil price drop. There is usually a timing lag on the product pricing movement that allows refiners to capture greater margin during a falling crude market. Unfortunately, as this effect wears off, the weak demand fundamentals still present a gloomy outlook for refiners,” Michael Connolly, a senior consultant for the global refining team at ICIS, told Lube Report.

The effect will likely be felt throughout other refined products, such as fuels, due to reductions in numbers of planes flying and ships sailing.

“With the ongoing Covid-19 situation, there is weak demand for transportation fuels, with jet fuel suffering in particular. When Covid-19 ultimately unwinds, we should see some improvement, but if uncertainty lingers in the crude market, it could overshadow this when it comes,” Connolly said.

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