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ECONOMY | 09-03-2020 17:21

Black Monday: keys to understanding this week's fall in oil prices

Trade war between Russia and Saudi Arabia is shaking the oil-dependent countries with prices in the range of US$30 a barrel, while markets are also facing the consequences of the Coronavirus outbreak.

The European markets woke up Monday registered falls of 8 to 10 percent. A fortnight ago there was a drop of more than 10 percent in the US stock market and now it is being replicated in Europe.

The coronavirus outbreak has a strong impact because it reduces global activity and in turn generates a drop in the global price of oil, which is aggravated by the trade crisis between Russia and Saudi Arabia.

Last week, a meeting was held in Vienna between OPEC and OPEC+ (Russia and other countries) where Saudi Arabia proposed cutting production to maintain the price of oil but Russia opposed reducing production. In this context, Saudi Arabia started a price war to displace its competitors and flooded the market by depressing prices by 30 percent.

For international analyst Jorge Castro, the epicentre of this fall is the trade war between Russia and Saudi Arabia, as the latter seeks to gain new markets. 

"It can do so because its extraction costs are the lowest on the market," he told Perfil. "This allows it to compete with Russia – which is a large producer but with higher extraction costs – with a very large margin of competition.”

Castro recalls that "if the price of the barrel has fallen to US$32, the cost of extraction from Arabia must be in the order of US$10 or less. So it may be that the price will continue to fall. Arabia has no established limit because its level of competition is very important," he said.

For his part, international analyst Luis Palma Cané considered the reaction of the markets to be "exaggerated" and recalled on Monday in the program "Every Morning" that "another time a drop in oil prices would cause an increase in consumption in oil-importing countries.”

Of course, in those circumstances there is no coronavirus that irons out all activity. As the global economy is feeling in the flesh.

'Black swan' events

"When we have a black swan on the market, panic reigns and anything can happen," explains Celina Mesquida, RJO' Brien's US Broker in dialogue with Perfil.

"The market is in a panic. It took quite a while to hit it. At first it was thought that the coronavirus was going to stay in China but when more affected countries began to appear, there were strong reactions in the market, even 2 weeks ago there were 12 percent drops that had not been seen since 2008. Last week it improved a bit and many saw the possibility of buying stocks at low values. But we are still in a panic and this is compounded by oil," the analyst said.

"It is complex because there is less growth in the world because of less transport, even a sharp fall in sea freight was recorded [China contracted its imports and exports]. The oil-dependent countries are going to have to go out and sell more oil," he pointed.

A greater supply in a world that uses less oil translates into a very low price of crude oil that also impacts other commodities, which is why there were sharp falls in soybeans, oil and soy flour.

"The market is in a paranoid mode, in the US people don't travel, they don't go to convention centres, flights are restricted and this makes the growth stop," stressed Mesquida. 

The big question is for how long, and this will partly depend on how long the pandemic lasts.

"As long as the solution is not there, we'll continue to be stuck in this situation. The problem is that the virus is spreading to poorer countries with fewer resources to deal with it and that will bring other consequences," he said.

At a local level, Palma Cané assured that "Argentina is also going to have an impact," adding that "the fall in oil prices hits Vaca Muerta."

In fact, YPF CEO Daniel González, at his annual conference with Wall Street investors the week before, noted that with Brent levels below US$50 there is no room to develop new unconventional production fields, such as those at Vaca Muerta.

"We are having low break even with new drilling in already developed blocks, but it is difficult to make investments in new blocks with international prices below US$50," he indicated.

Structural issues

For the analyst Jorge Castro, Argentina's problem is more structural and exceeds the price of oil.

"In principle it seems to affect Argentina in the production of Shale gas and Shale oil in Vaca Muerta and Cuenca Neuquina. However, this is just an appearance. What prevents Argentina from receiving investments in Vaca Muerta is that the country has a country risk rate of more than 2500 basis points, only preceded by Venezuela."

"So what Argentina has is a world record in terms of risk rates, which does not make it viable for it to receive foreign direct investment," he argued.

United Air will reduce flights to China in response to the US virus alert. Regarding RJ O'Brien's Mesquida oil prices, he said.

"When we panic, the last ones in are the first ones out and at some point the market is going to have to recognise the situation of base consumption," although he acknowledged that it is not easy to know how far this situation can spread.

"At the end of the day, the world will have to keep on consuming. With this drop in price there are rumours that China has already bought wheat, Ddgs and sorghum from the US, although now we do not see it because we are with the screen clouded by the effects of Coronavirus. But the truth is that when the world needs food the price of the products should not go to zero," he analysed.

"Oil can reach a technical level of US$25 a barrel, as it did in 2008. But for many countries its production price is much higher – as it is in Argentina – which makes it unviable. In any case, the biggest problem will be for the countries that depend on this commodity 100 percent," he continued.

However, with respect to quotations, she was more cautious. "Everything is at a support level, because do we really believe that the price can go to zero? Consumption will continue and that will lead to a certain price level," he concluded.

Lorena Rodríguez

Lorena Rodríguez


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