One of the best ways to judge what the global economic outlook will be is to analyze the market of a commodity. Oil is one of the most traded commodities around the world. There are two major factors affecting the oil market – and thus the global economy – in early 2020. These are the OPEC+ price war and the economic impact of COVID-19, which has the potential to lead to a global recession. But, how will these affect the oil market outlook?

Oil Prices Drop – What Next?

With many nations in government-imposed lockdown, industries grinding to a halt, and all but essential travel being curbed, oil consumption has seen a decline. Experts suggest that the markets have seen the biggest plunge since 1991. The official International Energy Agency forecast for growth has been completely discarded as demand has seen 90,000 fewer barrels per day be needed. Indeed, commonly used energy products such as gasoline are created from light and sweet oil, such as Brent Crude oil, which is one of the most commonly traded commodities when it comes to crude oil trading. Its position in the market can tell a lot about the global economic outlook.

Oil futures slumped 25% for both the NYSE and the LSE. The contributory factors of both the global pandemic and the oil war between Russia and Saudi Arabia have stifled the global economy, with many predicting a 2008-style crash or even a return to the Great Depression.

Given the nature of the stock market, oil stocks plummeting resulted in shockwaves across the entire exchange. Those searching for more oil have already announced they will suspend drilling expeditions for the time being, while many rushed to sell off their stocks in related companies, leading to the biggest sell-off since the 2008 financial crisis. These drastic moves could contribute to further economic discord. But we are seeing that countries such as the USA are making moves to keep the industry intact, with smaller price rises.

Saudi Arabia and Russia At Odds

Determined to get back on track, Moscow and Riyadh have both announced they will pump more oil in a bid to attain the top spot as Russia and Saudi Arabia look to be engaged in a price war. Indeed, Saudi Arabia cut its oil prices, despite Russia rejecting an OPEC+ suggestion that oil supplies were lowered to improve the prices. They suggested that as demand was drying up, they cut supplies to match. Saudi Arabia needs $80 per barrel, while Russia needs $40, in order to balance the sheet. Russia hit back and claimed that it could handle a price war.

Both leading members of the OPEC+ alliance of 24 oil-producing nations, the rift could lead to further economic implications throughout the world. A price war between Saudi Arabia and Russia could reverse almost three years of progress from OPEC+ as prices have returned to what they were before the alliance was established.

The current oil outlook is in a position of contango or forwardation, where the price today is lower than the futures price – as shown through the large supply and low demand. This means that the oil could be bought cheaply and then placed in storage until the markets rectify.

Trump’s Oil Opportunity

The USA, meanwhile, has made overtures to sell oil directly to Belarus. Despite the former Soviet country is reliant on Russia to prop up its economy and for cheap oil, the pair have had crossed words over the price of oil for some time now. Belarussian PM, Syarhey Rumas suggested that the drop in oil prices means Minsk has Moscow over a barrel. Spotting an opportunity, US Secretary of State Mike Pompeo’s move towards Belarus will have a knock-on effect in Russia.

President Trump’s 13 March 2020 announcement that the US Department of Energy would buy up stores of oil for the strategic reserve saw prices rise by 5%. Hugely supportive of the oil industry, Trump’s move looks to instill more hope into the industry to ensure that when the time comes it can rebound properly. He claimed that filling the reserve with cheap oil would result in it being cheaper for the American consumer, which reflects his protectionist leadership values. This move also reinforces Trump’s economy-first approach to the spreading coronavirus.

Many commentators are comparing the COVID-19 pandemic to the Spanish Flu of 1918-1920, which was followed by a period of depression in the early 1920s. The oil market hints that this could be another case of history repeating itself. Others suggest that we are more prepared for financial shock following the crisis of 2008 and would find a way to bounce back quicker and ensure the economy isn’t hit too hard. Those with investments in oil will find it hard to look away from their screens as each day brings with it new hope and a new concern.