Is the oil price war really over?

Early this morning major oil producing nations agreed to what has been described as an historic cut in global oil production of around 10 per cent (10 million barrels per day).

The deal by OPEC+ has been hailed as a “big oil deal” by US President Donald Trump is the biggest cut in oil production ever agreed after prices plummeted in response to over production by Russia and Saudi Arabia and sharp falls in global oil consumption in response to COVID-19.

Markets were underwhelmed by the deal as, despite its historic scale, the cuts were still smaller than the falls in global oil consumption. Current estimates range from 20 to 40 per cent (20 million to 40 million bpd) as global lockdowns slash demand for motor vehicle and aviation fuels.

That means the rate of oversupply will continue, with speculation that further cuts will soon be needed as global oil storages are filling up.

The oil price war has had a major impact on wholesale electricity prices in the NEM, with LNG prices falling by more than half to ten year lows in January, and wholesale spot electricity prices now trading around $40 per MWh.

That will have a material impact on new investment – in particular renewables and related technologies – if those soft prices are sustained due to oil and gas market volatility.

While providing price relief for consumers in the short run, weak oil and gas prices will force higher producers to cut production or close until prices stabilise around a supply demand balance. How long this takes in unclear, and will in part depend on how long lockdowns will run and and how severe demand cuts will be sustained.