Question:
The news has covered the sudden drop in oil prices, especially Texas oil (WTI), which reached about 30 below zero. Even Brent crude, known for its regular trading, dropped about 9% to reach $25 per barrel. The reasons cited varied, whether it was because oil reservoirs became completely full or even overflowing, or the impact of the Coronavirus which led to an economic downturn and subsequently a decrease in demand for oil, etc. So, what are the causes of this oil crisis? Is it ongoing? And how does it affect the American and global economy?
Answer:
To understand the reality of the oil crisis in general, and American oil (West Texas Intermediate) in particular, and its impact on the American and global economy, one must recognize three economic and political circumstances and their specific impact on Texas oil, and then the extension of that impact to Brent oil and the American and global economy:
First: The Impact of the Coronavirus on Oil Consumption:
Since the beginning of this year, with the spread of the Coronavirus starting from China, then moving to Europe and later to America, accompanied by the imposition of quarantine measures and the cessation of many economic sectors in every country, as well as the paralysis of aviation due to travel bans between many major countries, especially Europe and America for fear of contagion. Added to this is the massive disruption in international trade resulting from the sharp halt in demand for non-food and non-medical goods, which subsequently affected the transport movement. Note that land and air transport consume 68% of the oil supply (Independent Arabia, 24/04/2020). All of this led to global oil demand suffering a major setback due to Corona. This setback deepened further as the pandemic spread from one country to another, with the outbreak accompanying the paralysis of economic sectors in every country it reached. However, the relationship with oil varied; when the pandemic moved to major Western European countries, it caused a sharp drop in global oil demand, as these countries are major oil consumers. When the pandemic moved sharply to America, which consumes 20% of world oil, the oil price crisis began to loom sharply. Numerically, demand for oil collapsed by approximately 30% in a world that consumes nearly 100 million barrels per day. We take only two statements among many that confirm this collapse in demand:
1- The first statement: ("The International Energy Agency expected today, Wednesday 15/04/2020, that global oil demand would decrease by 29 million barrels per day on an annual basis in April, recording levels not seen in 25 years..." Al-Wafd newspaper website, 15/04/2020).
2- The second statement: (Russian Energy Minister Alexander Novak announced that global oil demand has decreased by 20-30 million barrels per day, saying: "We have reached the bottom of the global oil demand decline now." Al-Arabiya Net, 22/04/2020).
Thus, demand for oil collapsed by a percentage that was unimaginable except in conditions of world wars! All this happened in a period of (3-4 months), i.e., during the Corona crisis, until Texas oil reached the deep bottom, about 37 below zero, on 20/04/2020, which was called "Black Monday."
Second: The Second Circumstance, Which is the Political Circumstance:
Since oil is a strategic commodity, states use it to strike other states. We are talking here about the American policy that pushed Saudi Arabia toward an oil price war with Russia only one month ago. The explanation of this is as follows:
1- America was forcing Russia to reduce its oil production to maintain high oil prices so that American shale oil companies could compete in the markets, because extracting American shale oil is very expensive. Through this policy, Saudi Arabia succeeded over three years in persuading Russia to join OPEC in reducing production within the new group known as "OPEC Plus" by 2.1 million barrels per day. This Saudi agreement concluded with Russia was set to end in late March 2020. It was an agreement made before the spread of Corona, and its end coincided with the Corona outbreak.
2- With the spread of the Coronavirus in China and the beginning of its outbreak in Italy, oil prices began to collapse, reaching $45 per barrel (Brent). This price level, which continued to fall, is dangerous for American oil producers and threatens to drive them out of the market, making it necessary to raise the price. At that point, America pushed Saudi Arabia to exert pressure on Russia for further production cuts to face the continuous decline in global oil demand due to the virus. Thus, the OPEC Plus meeting on 06/03/2020 occurred, where Russia refused any additional cut in production, fearing America would replace the reduction with shale oil!
3- With the failure of the aforementioned "OPEC Plus" meeting, oil prices immediately collapsed by 10% due to the news of the disagreement within the OPEC Plus group.
4- A few days after the failure of the meeting, Saudi Arabia ignited a price war against Russia to force it into the new cut through five steps:
a- The first step: abandoning the first agreement (the 2.1 million barrel cut) despite Russia's announcement of its commitment to this previous agreement.
b- The second step: a massive increase in its oil production starting from April 1st (the expiry date of the first cut agreement with Russia) reaching 12-13 million barrels per day, despite the global oil demand problems due to Corona.
c- Offering a discount to its Asian customers by $6 per barrel, the first in history at this level of discount.
d- Intentionally targeting and increasing discounts for customers dealing with Russian oil to take Russia's market share.
e- Renting giant oil tankers to use as floating storage at sea, further flooding the market with oil glut.
5- With these steps by Saudi Arabia announced in the few days following 06/03/2020 (the failed OPEC Plus meeting), oil prices collapsed by a third ("Oil prices lost up to a third of their value on Monday in their biggest daily losses since the 1991 Gulf War after Saudi Arabia signaled it would raise production to increase market share while the coronavirus outbreak is already causing an oversupply in the market! Subsequently, Brent Crude futures fell 22 percent to $37.05 a barrel after earlier falling 31 percent to $31.02 a barrel, the lowest level since February 12, 2016... Reuters 09/03/2020"). Note that Brent Crude is extracted from oil fields in the North Sea and is a blend of crude oils—Brent, Forties, Oseberg, and Ekofisk. It is used as a benchmark for pricing two-thirds of the world's oil production, especially in European and African markets. It is sometimes exported to the United States and some African countries if the price is right after taking shipping costs into account. Brent Crude futures are traded via the Intercontinental Exchange (ICE) in London. This means that Saudi Arabia, with those steps, pushed oil prices down. After April 1st, when the Saudi steps were put into effect following the end of the "OPEC Plus" agreement with Russia, the oil glut became noticeable in the market, pushing oil prices (relative to Brent) below $30 during April and before 20/04/2020.
6- This Saudi policy was an American policy to pressure Russia, but it was a policy drawn up in Washington about two months ago, i.e., before the new dimensions of the collapse in oil demand due to the continued and sharp spread of Corona, especially inside America, became apparent. As a result of these two factors (the American-driven Saudi policy and the sharp increase in the collapse of oil demand), the sledgehammer created by the Trump administration to strike Russia began striking left and right, not excluding its own shale oil companies! This means that the reduction in oil prices planned by America was not expected to reach this bottom. This bottom was caused by both factors together: the American (Saudi) policy against Russia, as well as the continuous collapse in global oil demand—a collapse that was not foreseeable to this extent when that American policy was set. Pressure began to intensify within America on shale oil companies, and Whiting Petroleum announced its bankruptcy on April 2nd, while a hundred shale oil companies stood on the brink of bankruptcy because market oil prices were lower than production costs: ("The marginal cost for a shale barrel is about $35 per barrel. Arab Markets website, 11/03/2020"). According to Independent Arabia, 24/04/2020, West Texas Intermediate futures ranged on Thursday 23/04 between $15 for June delivery and nearly $27 for September delivery. All futures contracts until the end of 2020 were under $30, which puts pressure on shale oil.
7- Due to these dangerous circumstances facing the American oil industry because of the Corona pandemic, announcements from the US administration about its intention to intervene between Russia and Saudi Arabia to return to production cuts increased. The US President contacted the Russian President, who was eager for the return of contacts with America and hoped for coordination with it (not Saudi Arabia) regarding oil prices. Trump also contacted Saudi Arabia. Trump said, ("We had an excellent dialogue with President Putin. We had an excellent dialogue with the Crown Prince. Euronews, 01/04/2020"). Overall, it can be said that the Trump administration sponsored a Russian-Saudi agreement for a cut in oil production, the largest in history at about 10 million barrels of oil per day: ("Members of the Organization of the Petroleum Exporting Countries (OPEC) and their allies reached a record agreement to reduce global oil production by 10 percent after demand fell... what has been confirmed so far is that OPEC and its allies will reduce production by 9.7 million barrels per day. BBC, 12/04/2020"). This agreement began implementation on 01/05/2020 and lasts for two months, after which the signatory countries will review the reality of global demand again to decide the next step. It is a short-term agreement for two months, waiting for global oil demand to rise by the end of June. However, it is noted that the oil price crisis reached such depth that markets did not respond to this very large agreement. Prices only rose marginally and Brent prices returned to below $30. The explanation for this is that global demand has decreased by 30 million barrels per day, so a production cut of 10 million barrels per day cannot rescue it!
Third: The Third Circumstance, US Oil Reserves:
There are two types of oil reserves in America: first, the state's strategic reserve, and second, the companies' reserves. This circumstance contributed along with the other two in deepening the oil crisis. Part of it relates to the state of the strategic reserve, while the other part is specific to West Texas Intermediate oil. To clarify this:
1- The Strategic Petroleum Reserve (for the state) in general consists of underground tanks, mostly for storing extracted oil for use during crises. Many countries built these tanks following the recommendations of the International Energy Agency due to the oil crisis in the 1973 war. Additionally, each major consuming country has its own oil tanks with capacity for its needs for 30-90 days in case of interruption.
2- In 1975, the US Congress passed legislation requiring the federal government to establish storage sites for enough crude to secure demand in case of any type of acute risk to supplies. US storage sites are located on the coasts of Texas and Louisiana, and the state incurs heavy security costs for them. The maximum amount of this strategic reserve in America reached 727 million barrels in 2009. In addition to federal reserves, American energy companies store their own quantities, which in total equal the federal reserve quantities. Such surface tanks for companies are numerous in the state of Texas, as it has long been the largest oil-producing state in America, called "West Texas Intermediate," as well as in the neighboring state of Oklahoma, from which Texas oil is transported to the American heartland.
3- With the previous collapse of oil prices on 06/03/2020 and the subsequent price war between Saudi Arabia and Russia, many countries, especially America and China, moved to fill their strategic oil reserves. Trump rejoiced at the drop in prices at the time. America worked on buying cheap oil from Saudi Arabia or others. Before "Black Monday," Texas tanks were somewhat full, though not completely. Thus, the oil reserve problem reached a level of crisis and saturation, such that directing more extracted oil (in case of no sale) to storage became a complicated issue and sometimes unavailable, meaning the closure of the storage channel as a solution for oil producers, especially in Texas.
4- Thus, the US Strategic Petroleum Reserve was largely filled, and oil tankers began serving at sea as storage facilities. This exacerbated the storage problem, extending it to the storage facilities for West Texas Intermediate oil at its delivery point at the town of Cushing, Oklahoma, north of Texas. ("Stored crude quantities are increasing in the United States, particularly in Cushing, the delivery point for US West Texas Intermediate in Oklahoma, as refineries scale back activities in the face of weak demand. Al-Jazeera Net, 20/04/2020"). The maximum storage capacity of the Cushing point is 76 million barrels. Usually, oil contract holders can receive physical oil in Cushing when those contracts expire and can store it there at regular, non-elevated prices until it is transported within the US heartland to inland states. But what happened: ("In Cushing, Oklahoma, specifically, where WTI crude is stored, the volume of reserves increased by five million barrels and became close to the maximum limit. US stocks of fuel and refined products also rose while weekly consumption fell more than 25 percent over a year due to isolation measures. Rai al-Youm, 25/04/2020"). Thus, it can be said that the unprecedented decline in global oil demand, estimated at 30% (about 30 million barrels of oil per day), is the first and main cause of the successive collapses in oil prices that we are witnessing. Since the American-Saudi policy of pressuring Russia was only suitable for implementation in normal times and not during demand crises, it resulted in a glaring exacerbation of the oil price problem!
Fourth: All of this affected West Texas Intermediate oil; storage facilities in Oklahoma became saturated, and there was no longer room for storage except at extremely high prices. It became necessary to get rid of those contracts at any price. This was the West Texas Intermediate oil crisis or "Black Monday" on 20/04/2020, when oil was sold at minus $37 per barrel, and exchange dealers in America suffered heavy losses. What brought things to this point and increased the crisis was what we mentioned earlier—the filling of the Cushing tanks. When reserves approach the maximum limit, which is a very rare occurrence, storage prices jump. Because the prospects for oil consumption due to the continued closure of the economy were still vague and suspicious, storage prices in Cushing facilities jumped strongly and became another factor pressuring the May oil contract holders. They tried to get rid of them at any price; the prices of those contracts dropped to $10, then five, then continued the descent to zero in a dramatic scene, then quickly dropped below zero to sell the last of those May contracts at minus $37.6 amid great astonishment of the holders who suffered heavy losses and the astonishment of exchange dealers. This is how the "Black Monday" crisis of 20/04/2020 happened for West Texas Intermediate oil, and those were the circumstances that gathered in one place to create this acute crisis. Subsequently, the West Texas Intermediate crisis occurred, and Trump's celebration of the OPEC Plus agreement between Saudi Arabia and Russia was of no use when he said on 12/04/2020, ("This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate Russian President Putin and Saudi King Salman bin Abdulaziz." CNN Arabic, 21/04/2020). Trump's celebrations were far from reality because the collapse of prices in this terrible way created great fears in the world and not just in America. Consequently, the economic crisis intensified, let alone the energy sector, as its bubbles have become ready to burst!
For information, West Texas Intermediate is extracted from oil fields in the United States, mainly from Texas, Louisiana, and North Dakota, then transported via pipeline to Cushing, Oklahoma, for delivery. WTI futures are traded via the New York Mercantile Exchange (NYMEX), owned by the Chicago Mercantile Exchange (CME).
Fifth: On the other hand, since the beginning of the Corona crisis, America has adopted plans for support, rescue, or stimulus. These plans were gradual: first, a small plan worth $8.3 billion in emergency spending to support health programs to enable them to face the Corona outbreak in America. After the Corona pandemic began striking the economy outside the health sector, ("The United States cut interest rates to near zero and launched a $700 billion stimulus program in an attempt to protect the economy from the impact of the Coronavirus. BBC, 16/03/2020"). It flooded the markets with dollar liquidity to face the liquidity shortage, and then adopted a stimulus plan with a legendary value of $2.2 trillion on 27/03/2020, which is the largest plan in American history, most of it allocated to buying the debts of companies on the verge of bankruptcy to prevent their collapse. During this, ("The Federal Reserve had earlier announced that it would buy at least $500 billion of Treasury bonds and at least $200 billion of mortgage-backed securities. The US central bank also announced the creation of a new program that will provide up to $300 billion in new financing in an attempt to support the flow of credit to employers, consumers, and companies. Traders Up, 24/03/2020"). Furthermore, the volume of health expenditures on those infected with the Coronavirus is expected to be catastrophic in America and may drive insurance companies to collapse—and these are very large companies. Additionally, America is suffering from a severe unemployment crisis, as about 30 million Americans have lost their jobs under the impact of the Coronavirus. Because the companies that employed them are in a miserable financial situation, their return to their jobs will not be quick this year. This large number reflects on the general budget with the large volume of government aid seekers, for which more than 22 million unemployed Americans have registered, and the list continues. If the state continues to adopt large rescue packages, the American currency may witness a terrible collapse, the heat of which will be felt by America and all countries and peoples that deal in the dollar.
Sixth: This crisis has hit not only America—though it is the most severe there—but it has also hit other countries in the world:
1- Regarding Europe, its situation is no better than its peer America. The repercussions of the Corona pandemic have threatened its political structure alongside the economic repercussions. What we are witnessing of this pandemic's crises in Italy, France, Spain, Germany, and Britain has a clear significance. French President Macron warned in a press conference via phone on 26/03/2020, "that the outbreak of the Coronavirus threatens the basic pillars of the bloc..." He added, "The European project is at risk... The threat we face is the elimination of the Schengen area." (Russia Today, 26/04/2020). German Chancellor Merkel said, ("From my point of view, the European Union faces the biggest test since its founding... It is important that the bloc emerges strong from the economic crisis caused by the virus"... Reuters 07/04/2020). The Prime Minister of Spain, Pedro Sanchez, said on 05/04/2020, ("Current circumstances are exceptional and call for firm positions; either we rise to the level of this challenge or we will fail as a union..." Frankfurter Allgemeine, 05/04/2020). EU leaders in their meeting via video on 23/04/2020 agreed on an immediate rescue package of about 500 billion euros, but they left the disputed details for larger financing until the summer. They discussed establishing a relief fund and issuing joint "Corona bonds." However, Germany, the Netherlands, Austria, and Finland announced their rejection of these bonds and did not agree to the idea of the fund. Meanwhile, France, Italy, and Spain support the project, as they are the most affected countries. Germany's refusal is because it aspires to give loans in its own name so that these countries become indebted to it, in order to control other European countries!
2- Regarding China, the World Bank warned that "the repercussions of the global economy could cause the growth of the Chinese economy to fall to 2.3% this year compared to 6.1% in 2019" (Al-Hurra American page, 10/04/2020). The page quoted a Chinese central bank official as saying: "He recommends that Beijing not set a growth target this year, given the massive uncertainties it faces." The official Economic Daily quoted "Ma Jun," a member of the Monetary Policy Committee of the People's Bank of China, as saying, "It would be difficult to reach a growth of 6%," adding that "setting a target could limit official measures to deal with the virus's repercussions."
3- As for Russia, it depends on oil and gas exports by 60%. Oil is considered the lifeline of the Russian economy, which has begun to suffer from the losses it incurs. The Russian currency, the Rouble, has reached its worst state, falling until the dollar became equal to about 79 Roubles following the oil price war. In reports from Reuters about the situation in Russia, it quoted a Russian bank as saying, "the GDP could shrink by 15% if oil prices drop below ten dollars per barrel."
Seventh: Capitalism has shown its defects more clearly, and its inability and confusion in dealing with the Corona crisis have appeared. Selfishness has emerged among its states, which have been subjected to severe blows that threw them to the ground. Nothing remains but the ancient and correct Islamic ideology. There is an opportunity for the Islamic Ummah to launch anew... However, the regimes in the Muslim lands and those in charge of them stand as an obstacle to the movement of the Ummah. These rulers insist on hostility toward it and on being linked to the major colonial states. The Ummah needs a sincere and truthful leadership to lead them according to the upright Islam. It undoubtedly realizes that Hizb ut-Tahrir is the leader that does not lie to its people, so let it work with it truthfully:
وَلَيَنْصُرَنَّ اللَّهَ مَنْ يَنْصُرُهُ إِنَّ اللَّهَ لَقَوِيٌّ عَزِيزٌ
"And Allah will surely support those who support Him. Indeed, Allah is Powerful and Exalted in Might." (Surah Al-Hajj [22]: 40)
O brothers, events indicate that the international position after Corona is not as it was before. The states that used to consider themselves gods on earth, charting for themselves legislation and laws contrary to what Allah (swt) revealed to His Messenger (saw), making falsehood as truth and truth as falsehood—these states have proven their helplessness before a tiny, tiny creature that can hardly be seen, which threw them to the ground while they flounder in how to treat it and stand before it... and they are still floundering in the darkness of their injustice until the words of Allah, the Powerful and Exalted in Might, slap them:
وَقُلْ جَاءَ الْحَقُّ وَزَهَقَ الْبَاطِلُ إِنَّ الْبَاطِلَ كَانَ زَهُوقاً
"And say, 'Truth has come, and falsehood has departed. Indeed is falsehood, [by nature], ever bound to depart.'" (Surah Al-Isra [17]: 81)
The dawn of the Khilafah will rise anew, illuminating the world and spreading goodness across the globe:
وَيَقُولُونَ مَتَى هُوَ قُلْ عَسَى أَنْ يَكُونَ قَرِيباً
"And they say, 'When will that be?' Say, 'Perhaps it will be soon.'" (Surah Al-Isra [17]: 51)
6th of Ramadan the Blessed, 1441 AH Corresponding to 29/04/2020 CE