The price of oil has collapsed this year, down more than 30%. Brent crude closed Friday at a multi-year low of $45.27, a 9% reduction, and West Texas Intermediate fell more than 10%. [CNBC]
The declines appear to be based on a painful set of circumstances that have dealt a one-two punch to the industry. With declining demand, and an opportunity for increasing supply, prices will likely continue to fall.
Supply up, demand down
The collapse in prices may be exacerbated by the current production controls expiring at the end of March. The Oil Producing and Exporting Countries (OPEC) agreement had curtailed production to less than maximum.
However, talks to keep those deals in place have stalled, and, as of April 1, OPEC countries can flood the market with crude. For example, Saudi Arabia will likely increase production as much as 30%, from 9.7 billion bpd to over 12 billion bpd.
This probable production increase is made only more painful by the collapse in demand due to coronavirus. Chinese imports have declined massively, and the reduction in international travel has left unused crude sitting in tankers around the world.
While buying is still occurring, importers are able to pay drastically less because of the glut of supply. And what little demand there is appears to be cruising toward reductions as well.
This perfect storm of supply and demand may drive prices of oil down to decade-long lows. Many analysts see $20 a barrel as a genuine potential. Ali Khedery, CEO of strategy firm Dragoman Ventures, said:
“$20 oil in 2020 is coming. Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc – may prove existential 1-2 punch when paired with COVID19.”
The failure of centralized systems like OPEC to make important supply reductions reveals the brilliance of Bitcoin. The digital currency is set to undergo an in-built halving, which will see rewards for miners decrease by half.
The reduction in mining rewards will reduce supply, even as demand for the coin is increasing. Because the decentralized currency cannot be tampered with, such inflation controls allow for genuine stability, unlike corporate or political confusion.