Brent barrel falls 15% to 1999 prices

The Brent barrel, the benchmark for Europe and the Middle East, due to be delivered in June, plummeted by 15% on Wednesday to $16.38, a figure not seen since 1999. The crude oil further extends the drop recorded on the previous day. In the previous session, Brent closed with a sharp fall of 25.45%, as a result of oversupply in the market and the collapse of West Texas, the United States' benchmark. 

The plunge in demand due to the COVID-19 crisis and the lack of resources to store surplus production are weighing on the prices of both Brent and West Texas. Producing nations are being hit with this downward trend. For example, Algeria had based its austerity budget to cope with the pandemic on the forecast of charging up to $50 per barrel.  

A lack of agreement between the OPEC+ countries, which groups OPEC countries with other producers such as Russia, who met Tuesday to tackle the volatility that has taken place in the oil market in recent weeks, has also weighed on the Brent's price.  

With the opening of the European markets, the Brent barrel has slowed down its fall to 8.885%, reaching 17.62 dollars a barrel, which is a rebound of more than 10% from the minimum level at which it had been quoted before the opening of the European market. So far this year, Brent has suffered a 73% depreciation. The West Texas barrel was slightly positive on Wednesday, reaching $11.74 per barrel, 1.47% above the price at the close of the markets on Tuesday. 

Russia has considered on Wednesday that it is necessary to wait for the results of the new agreement of the alliance to curtail the supply of oil before adopting new measures to stabilise prices in the market, such as the construction of new depots in the country. "First we must analyze how the agreement to cut production reached by OPEC + last week will influence," explained the Kremlin spokesman, Dmitri Peskov, in a telematic press conference that was picked up by the Efe agency.  

"The dynamics of oil prices are negative and we are living through difficult times, we cannot evaluate the situation only for a day or a week, we must do it with more perspective", the Russian official assured. "Now we simply have to wait", he stressed.  

The last OPEC + agreement, reached on April 12, foresees a decrease in supply of 9.7 million barrels per day in May and June, to which would be added the reduction of another 10 million from other important producers that are not part of that group, such as the United States and Norway. 

However, the consensus on cutting production has not prevented the collapse of oil prices due to the major impact of the COVID-19 pandemic on the world economy. 

Therefore, Russian oil from the Urals brand, traditionally cheaper than Brent, a reference in Europe, was quoted on Wednesday at 11.59 dollars per barrel in the Dutch port of Rotterdam.  

Oil-producing countries fear a huge impact of the pandemic on their economies because of the economic slowdown and their dependence on this raw commodity. Algeria is one of the nations that fears the impact most. The administration designed an austerity budget to deal with the health and economic crisis in which it counted on charging each barrel of Brent at 50 dollars. "This fall in oil prices will lead to a rise in the tax and current account deficit and will further weaken the country's macroeconomic indicators," wrote journalist Ali Titouche in the daily Liberté on Wednesday.  

The International Monetary Fund (IMF) indicated in its report presented last week a forecast of a fall in GDP of -17.1% and a current account deficit of -18.3% and GDP. The French banking group, Crédit Agricole, has predicted that the tax deficit and the external deficit will grow by 10% of GDP. Algerian hydrocarbon exports will also fall by half as long as Brent prices remain between 25 and 35 dollars for much longer, according to the daily Liberté.  

Although some countries are suffering, others are trying to seize the moment. Australia announced on Wednesday that the government will spend $59.6 million to buy oil and create a strategic oil reserve to take advantage of the price collapse caused by COVID-19. "With the new measures, Australia will get its first oil reserves in order to ensure energy security. This will include an agreement with the United States to store crude oil from the Australian government," said the Minister of Energy and Emissions Reduction in a statement released by the Efe agency.  

Australia has been negotiating access to the US SPR - strategic oil reserves - since 2018, when Australian Energy Minister Angus Taylor and his US counterpart Dan Brouillette signed the first such agreement. "The new measures will take advantage of current low crude prices and Australia's privileged access position to the SPR, which is among the most affordable long-term oil storage facilities in the world," Taylor said. 

In addition, the Ministry announced that the government will work with the private sector to explore measures to improve energy security, and with refineries to take temporary measures to de-clog fuel reserves, which have been affected by the lack of demand due to policies adopted in countries around the world to combat the COVID-19 pandemic. 

China, which lacks raw materials, is also taking advantage of the price collapse to build up oil reserves and is filling its oil tanks. "Major oil importers, such as China, are stockpiling reserves when prices are low and that could help keep prices from sinking further in the face of weak global demand," explains Lei Sun, senior consultant at Wood Mackenzie, a global energy, metals or mining consulting firm, in a note to clients.