Unprecedented Price Crash – What Happened?
crude. This drop in demand put unprecedented downward pressure on the price of oil.
By: Ken Rice Adjunct Professor South Texas College of Law Houston
The second factor greatly contributing to the price crash was the brief price war that emerged between two members of the Organization of the Petroleum Exporting Countries organization (OPEC+): Saudi Arabia and Russia. In March of 2020, Russia refused to agree to additional production cuts requested by OPEC. Saudi Arabia responded by reducing their price to Asian buyers and announcing that crude production would be increased from just under ten million barrels per day to over twelve million barrels per day, putting additional downward pressure on the price of crude.2 Eventually, the members of OPEC+ were able to reach agreement on production cuts and stabilize supply levels, but this initial disagreement greatly contributed to the price crash.
Although the oil and gas industry has seen significant price volatility since the seventies, never before have we seen the level of volatility as experienced earlier this year. Not only did the crude price crash, but for the first time in history, crude futures for West Texas Intermediate (WTI) went negative, meaning that sellers of crude were actually willing to pay buyers to take future deliveries of the product. What caused this unprecedented event? What were the series of events culminating in the widest crude price swings and most severe price crash in the history of the industry? This article addresses those questions.
Evolution of Covid-19
Overview
The first cases of COVID-19 were reported in December of 2019, in Wuhan, China. 3 Within the next few weeks, the disease spread to other parts of China, due mainly to the size and transient nature of the Wuhan population. The Chinese government attempted to prevent the spread of COVID-19 by imposing a mandatory quarantine in Wuhan on January 23, 2020, but by that time, millions of residents had already left the city. Within a month from the first reported case, the virus had spread to several other countries, including Italy, the United States, and Germany. 4 On January 22, 2020, the World Health Organization (WHO) Director General convened the WHO Emergency Committee to discuss whether to declare the outbreak in China as a public health emergency of international concern. The committee members could not reach a consensus at that meeting and requested to reconvene ten days later after further information gathering and additional consideration of the
At the macro level, the price crash of early 2020 was caused by two primary factors. The first was the spread of the COVID-19 virus, which had huge negative impacts on the global economy and demand for hydrocarbons. Governmental responses around the world resulted in significant oil and gas demand destruction as governments took measures to slow the spread of the disease. These measures included shelter-in-place requirements for many countries, the closing of businesses and other non-essential sectors of the economy, and the halting of international travel. 1 Although the effectiveness of these measures in preventing the spread of the disease varies from country to country and is the subject of some debate, there is general acceptance that these preventive measures taken by governments, while successfully stemming the spread of the disease, drastically reduced the level of global demand for 13
