The oil price war between Russia and Saudi Arabia—which started shortly before it was driven from the news cycle with the advent of the coronavirus pandemic—became newsworthy once again due to its role in the subsequent record decline in oil prices. Dim forecasts for the oil industry have certainly been exacerbated by the COVID-19 pandemic, but the trend represented by the Russia-Saudi clash cannot be discounted.

The price war drove the cost of oil sharply lower in March and triggered the biggest decline in U.S. import prices in more than three years, delivering an enormous blow to American energy producers.   

Earlier this week, the West Texas Intermediate benchmark (a key indicator of U.S. crude prices) tumbled into the negative for the first time in history at -$37.63 per barrel. According to Forbes, “Producers literally couldn’t give away a barrel of oil. The collapse of oil prices, stirred by the pandemic and the Saudi-Russia price war, leaves the world’s top oil-exporting countries facing an uncharted recovery path to navigate.”

Deconstructing the Price Plunge

The price index for U.S. oil imports sank 2.3% in March to mark the largest drop since early 2015 (the last time falling oil prices significantly impacted the energy industry). According to U.S. government sources, excluding energy, import prices were flat. The cost of imported oil fell by 27%, reflecting the biggest drop since November 2008 during the global financial panic. Prices also fell 9% in February.

Following a major disagreement on production limits, Russia and Saudi Arabia flooded the global market with oil, which sent oil prices into a freefall. On the American side, this translated into the cost of West Texas intermediate crude standing at $21.33 a barrel in trades this week, about one-third of its price at the end of 2019. The last time it was that low was more than a decade ago, following the global economic implosion of 2008.

In the aggregate, U.S. import prices have fallen 4.1% in the past 12 months, the sharpest decline in almost four years.

Where Did the Demand Go?

Apart from the declines connected to the Russia-Saudi price war, demand has sharply fallen off with the world’s economies shut down by the pandemic, according to the International Energy Agency’s (EIA) market report for April. The United States, Europe, India, and China are refusing oil shipments because of huge storage gluts.

In these cases, exporters have no choice but to pay midstream gathering and logistics oil companies to take the commodity off their hands, according to Forbes. Some companies have begun to convert facilities for storage to accommodate the reduced demand.

China canceled ten shipments from Saudi Arabia for April and May. OPEC countries like Nigeria, Angola, and Iraq as well as Russia (which is not an OPEC member) are facing additional cancellations. The IEA suggests that oil demand will remain negative at least until the second half of 2020. Experts expect additional emergency measures from the G20 nations and OPEC in the coming weeks, since efforts in the preceding two weeks fell far short.

Oil’s price freefall—for which analysts see no end in sight—threatens the stability of the entire oil industry, a critical player in a stunned global economy, and a central one in any recovery effort.

Finding Equilibrium in the “New Normal”

While an IEA report released earlier this month did not predict the price collapse into negative territory, the agency did note the mounting uncertainty, saying that “No one knows the real impact on the millions of people employed by the oil industry around the world.”

As mentioned earlier, government sources indicated that import prices have remained flat minus fuel, but it is not predicted to stay that way. The pandemic has severely disrupted international trade, and declining economic activity will probably force many suppliers to cut prices to attract buyers. “A return to sustainable prices will require a recovery of the global economy as well as disciplined production by OPEC and other major producers,” said Michael Garvey, head of oil and gas investment banking at Adour Capital. “The longer prices remain at these extreme lows, the more capital-starved the operations become, reducing production capacity.”