by Ivan Martchev

March 10, 2020

As I am writing this on Sunday, oil futures are down 20%, due to the inability of OPEC+ to reach a deal on oil price cuts last week, while demand for oil is falling sharply. While it is always unwise to assume, I would put incredibly high odds for crude oil to retest the January 2016 low of $26 in 2020.

The price of oil is not only about oil demand, which is rapidly deteriorating. It is also about oil supply.

Saudi Arabia seems determined to use the coronavirus shock to oil demand to hike output in what appears to be a calculated attempt to bring oil prices lower. It is well known that the Saudis wanted the price of oil to go down dramatically in 2014 and 2015, just as China was slowing down, in order to kill the U.S. shale boom. It would appear they are trying the same move again. (For more on this, see the March 7, 2020, Bloomberg article, “Saudis plan big oil output hike, beginning all-out price war.”)

Crude Oil Price Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Over the weekend, Saudi Arabia slashed the price for crude oil exports by the most in at least 20 years, offering unprecedented discounts at the expense of other suppliers. If this is also coordinated with a big production boost going to a record of 12 million barrels a day, prices will fall dramatically from here. That would be roughly a 20% boost in Saudi exports from present levels at a time when demand is falling rather sharply. That makes $26 a likely target for the price of crude oil – where it settled in January 2016.

United States Crude Oil Production versus Saudi Arabia Crude Oil Production Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

The Saudis don’t like the U.S. shale boom, as it marginalizes them as a key player in global markets. They also have a very low cost of producing oil, which by some estimates is $3 a barrel, while shale oil can cost $30, $40, $50 a barrel, or even higher. The thing about shale oil is that every field has different costs, but all shale oil is much more expensive than conventional oil, which causes the Saudis to use their cost advantage as a weapon in world markets, as they are doing in this case.

It is conceivable that crude oil can break $20 if global demand keeps getting affected by the coronavirus and the Saudis keep pumping and exporting oil. Oil did not stay under $30 for long in early 2016, so in this regard it did not “break” the U.S. shale boom. But what if crude oil stays in the 20s longer this time?

The key to the crude oil forecast becomes the coronavirus as it is unknowable how fast it will be contained. If it follows the normal flu seasonal pattern like SARS in 2003, new cases globally should be on the decline within one to two months. Then the coronavirus will no longer be helping the Saudis and they very well may fail again in their plan to break the U.S. shale boom.

Peak Month of Flu Activity Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Is China Meddling in the 2020 Elections?

I find it rather peculiar that the coronavirus, which likely originated in China’s Hubei province, efficiently eliminates the effects of the Phase I trade agreement reached by the U.S. and China.  It is also peculiar that the super-lab that did research on coronaviruses in China is in Wuhan. (For more see Foreign Affairs, March 5, 2020 “U.S.-Chinese Distrust Is Inviting Dangerous Coronavirus Conspiracy Theories.”)

Whether these conspiracy theories are “dangerous” or not, the coronavirus just cancelled the effect of 18 months of sabre rattling and trade negotiations with the Chinese. It all just seems too convenient.

United States Fed Funds Rate versus United States Ten-Year Government Bond Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Although I think it would be very difficult to prove, if somebody in Wuhan released the coronavirus on purpose, that would be the equivalent of meddling in the 2020 U.S. Presidential election. If the coronavirus has an economic impact and this is an election year, then the coronavirus is working against the candidate who benefits from a strong U.S. economy. The name of that candidate is Donald J. Trump.

Will the presumptive Democratic candidate, Joe Biden, be as tough on the Chinese on trade negotiations as Donald Trump? I doubt it, for as abrasive as President Trump has been, his actions are completely warranted when it comes to the unfair Chinese trade practices as well as the theft of intellectual property.

I am sure the Chinese would like to keep trade practices “as is” and the coronavirus is making this possible, for the time being, with its conveniently inadvertent outbreak.

All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

Global Mail by Ivan Martchev
With Saudi Help, Oil is Headed into the $20s

Sector Spotlight by Jason Bodner
History Indicates the Market Could Bottom Around March 20

View Full Archive
Read Past Issues Here

About The Author

Ivan Martchev
INVESTMENT STRATEGIST

Ivan Martchev is an investment strategist with Navellier.  Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev

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