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Low oil prices add to global economic woes: China Daily editorial

Apr.07,2020

Low oil prices add to global economic woes: China Daily editorial

Nearly one month into the oil price war between Saudi Arabia and Russia, there is still no sign of an early resolution, which bodes ill for a world economy already battered by the novel coronavirus pandemic.

An emergency meeting between the Organization of Petroleum Exporting Countries and Russia on Monday to discuss reducing global oversupply was postponed to Thursday, as both sides reportedly sought more time to prepare for the talks, suggesting the depth of the dispute.

The failure of Saudi Arabia and Russia to reach an agreement last month on cutting output, followed by both sides flooding the global market with excessive supply in a bid to grab a larger market share, forced oil prices to fall close to $20 a barrel last week from the high of more than $60 in January.

Although Riyadh and Moscow both insist they could adapt to low oil prices, analysts widely believe they overestimated their fiscal strength and underestimated the extent to which the pandemic could pummel demand.

In fact, the International Energy Agency has said oil demand could shrink this year for the first time since the 2008-09 global financial crisis, as the pandemic has forced airlines to cancel flights and kept vehicles off the roads.

More than $3 was the drop in Brent crude when Asian markets opened on Monday. It recovered some ground, though, as one of Russia's top oil negotiators said the two sides are "very, very close" to a deal.

But as Rystad Energy's head of oil markets said, even if the top oil producers agree to cut output by 15 million barrels per day, "it will only be enough to scratch the surface of the more than 23 million barrels per day supply overhang predicted for April 2020".

As of now, US shale companies, whose break-even price is between $40 and $50 per barrel, are the biggest losers in the price war, as evident from Denver-based Whiting Petroleum filing for bankruptcy protection last week due to falling revenue.

If the situation does not improve soon, many US drilling companies could run up defaults amounting to tens of billions of dollars this year. And to avoid such a scenario, Washington has been pushing Moscow and Riyadh to reach a deal.

Yet for China, which imports 70 percent of its oil, low prices are a good opportunity to purchase large volumes of oil and boost its strategic oil reserve, which will also help the country's petroleum industry to reduce costs and pass on the benefits downstream.

An expanded oil reserve could also serve as a stimulus and inject fresh vitality into the real economy which is struggling to recover from the impact of the coronavirus outbreak.