Why did oil prices collapse despite the OPEC Plus agreement? What is its future? The answer is expert

Muhammad Afazaz

Oil prices in world markets are witnessing historical declines, despite the pledges of the major producers to reduce production and reduce supply. What are the reasons for this? What are the expectations of analysts for the coming period?

The price of West Texas Intermediate crude barrel continued its decline in trading today, Monday, to less than five dollars a barrel, an unprecedented level for more than three decades, with storage facilities approaching full capacity after the collapse of global demand due to the Covid-19 outbreak.

Oil futures losses accelerated, as US crude tumbled more than 73% to $ 4.71 a barrel. American crude had slid to less than ten dollars, before continuing the landing journey.

Also, Brent crude prices fell in trading today by about 5%, to $ 26.7.

The quantities of crude stored in the United States, especially in Cushing, where the delivery point for US West Texas Intermediate in Oklahoma, are increasing, as refiners reduce their activities in the face of weak demand.

The Qatari oil affairs analyst Ahmad Al-Naimi told Al-Jazeera Net that the American oil reserves were close to their maximum limits, as 19 million barrels were stored in only one week, and this made the US crude descend to less than $ 15 a barrel, before continuing its losses.

Al-Nuaimi adds that the volume of inventory on board the tankers is 160 million barrels at present, which is a very large volume that increases the oversupply in the markets.

Why did prices drop?
Al-Naimi explains that oil prices are under great pressure in terms of demand and supply at the same time, and this has not happened before.

Oil prices - according to Al-Naimi - will remain at the mercy of the large decline in demand - especially from China, the largest consumer of crude in the world - due to the implications of the Corona virus on global economic activity on the one hand, and on the other hand the presence of large stocks, whether on land or tankers floating over the seas, in addition to To weak demand by refineries.

Al-Naimi stressed that market participants closely monitor the development of production (supply) on the part of producers, and the evolution of demand on the part of consumers, which explains their caution at the present time.

He considered that the current April will be a period of anticipation of what will lead to the implementation of the obligations of the agreement of the "OPEC Plus" countries and other producers, led by the United States, as of next May.

As for the oil expert, Dr. Ahmed Badr Al-Kouh, he considered that the drop that we are currently witnessing was expected, indicating that the rise that occurred after the agreement was temporary, and prices soon returned to descending again.

Al-Kouh pointed out that countries had stored large quantities of oil before the last agreement, that is, when prices were low, and he explained that the high prices depend on the extent of absorption of this stock.

The markets were flooded with low-price oil after Saudi Arabia, a member of the Organization of Petroleum Exporting Countries (OPEC), launched a price war with Russia (not a member of OPEC) in order to obtain the largest shares of the market.

However, the two countries resolved their dispute with the conclusion of an agreement earlier this month in which they agreed with other countries to reduce production by about ten million barrels per day to stimulate the markets.

However, analyst Ahmed Al-Naimi said that at a time when oil-producing countries (including America, Mexico and other countries) promised to reduce production by a total of approximately twenty million barrels of oil to support prices in the markets, expectations indicate a decrease in demand by about thirty million barrels per day in May. Next, which means there is a large surplus estimated at ten million barrels per day, which will push prices down. 

Al-Naimi’s warnings and expectations also said that unless the Corona virus crisis does not end, demand for oil will remain weak, and then will affect prices in the markets, pushing it further down.

He continued in this context that it will be very difficult to talk about oil prices within the limits of forty dollars before the end of this year, in the event that there are indications of the end of the Corona crisis. 

But if the situation remains as it is now - as Al-Naimi says - then US crude prices may decline to less than the prices currently recorded, and Brent crude to less than twenty dollars.

For his part, Ahmed Al-Kouh ruled out the increase in oil prices despite the "OPEC Plus" agreement to cut production, and said in an interview with Al-Jazeera Net that we will not witness a strong rise in prices until the end of this year.

He added that the price of forty dollars a barrel will be out of reach at the present time, but that may happen by the end of this year.

Al-Kooh suggested that oil prices fluctuate five dollars up and down, and attributed the low prices currently to the stock outperform the volume of demand globally, in light of the repercussions of the Corona virus, which paralyzed global economies.

Is there a need for a new agreement?
Al-Kouh does not see the need for a new agreement between the major producers, stressing the importance of implementing the content of the current agreement to send messages of confidence in the markets.

It is believed that oil prices will remain hostage to low inventory on the one hand, and high demand volumes - on the other hand - depending on developments related to confronting the Corona virus and the return of the global economic wheel to circulation, especially in China.

In an attempt to control the Corona virus, most countries across the world resorted to closing borders, preventing travel and applying quarantine, which severely affected global economic activity and pushed oil prices in recent weeks to its lowest levels in more than two decades.