First, thank the Federal Reserve, the ECB and other global central banks for their response to the COVID-19 pandemic. Then, the U.S. Senate and lawmakers around the world. Finished? Now, say thank you in advance to Saudi Arabia.
Why? Because of the Saudis, the global economy will have something extremely important to its recovery when it finally begins picking itself up from the devastation of the coronavirus: low oil prices.
Riyadh has unwittingly become one of the world’s biggest sources of support in this pandemic by destroying in just three weeks the oil price structure it has fought so hard to defend for decades.
Surprise Gambit That Turned Sour
What started as a surprise Saudi gambit to offer its existing customers, as well as prospects, with virtually unlimited supply of crude at rock-bottom prices — so that it could poach markets from rival Russian and U.S. oil exporters — is having disastrous consequences for the kingdom. 
Reuters reported on Thursday that Saudi Arabia was struggling to find customers for the extra oil it was putting out, after demand tanked due to the coronavirus crisis and higher freight rates.
Riyadh is working to boost its production from 9.7 million barrels per day to 12.3 million bpd.
Russia has also turned its spigots all the way up for a full-blown production-and-price-war with the Middle East oil power.
Reuters reported that Royal Dutch Shell (NYSE:RDSa) and U.S. refiners were taking less Saudi crude while Finland’s Neste (OTC:NTOIY) will not take any in April.
Indian refiners were seeking delayed deliveries on Saudi oil, while Polish refiners were easing up on purchases, it added.
And while freight rates for cargoes shipped from the Persian Gulf to the East had eased somewhat Thursday, they weren’t too far from around the $6-per-barrel level of recent weeks.
Crude Demand Craters
With benchmark U.S. crude settling at around $23 per barrel on Thursday, a freight rate of around $6 or below would still be a premium of at least 25% on the flat price — not exactly what you'd want to pay in an environment where almost all non-essential travel across the world had ground to a halt.
“To use just one word, the demand for oil has ‘cratered’,” said John Kilduff, founding partner at New York energy hedge fund Again Capital. “The numbers floating around are 20 million barrels of demand lost in a day. That’s 20% of what used to be a daily demand of 100 million barrels before the crisis.”
For more granularity, Goldman Sachs forecasts that global oil demand, which stood at around 100 million barrels per day last year, will fall by 10.5 million bpd in March and 18.7 million bpd in April.
For the year, oil consumption is expected to contract by around 4.25 million bpd, Wall Street’s leading energy forecaster said.
Added Kilduff:
“The Saudis are realizing they have a product or commodity they just can't sell easily. They did what they did at a very inopportune time and now they’re paying for it. They have an option, of course, to undo it and go back to tighter production. But they’re playing a game of chicken with the Russians and neither side will want to blink first, with pride being a factor too.”
Egos At Play
Phil Flynn, analyst at Price Futures Group in Chicago, concurs with Kilduff that the Saudis and Russians have both “let their egos decide the oil market.”
“Instead of acting responsibly, they’ve destroyed any shred of credibility they had as global stabilizers of oil prices,” said Flynn.
While the world may not need extra Saudi oil now, it will certainly require it at some point when the worst of the economic crunch forced by the pandemic recedes.
Of course, Riyadh will be eager to cash in the crude it holds then at the highest price possible.
But here’s the catch: the crude market has already lost more than 50% on the year and may not rebound as quickly as the Saudis hope. If damage caused to the global economy is so extensive, full recovery could take up to a year or beyond.
Quick Rebound Is Still A Question
Said Kilduff:
“I expect the Saudis will continue doing what they’re doing to destroy the high-cost producers of crude — i.e. U.S. shale — so that they can get as much market share as possible. They’ll be waiting, of course, for a comeback in demand, so that they can administer cuts again and get the prices they want.”
“And that’s where it gets complicated — because no one has an idea how long and bad the recession anticipated from this virus will be. While low oil prices are extremely stimulative to the global economy, demand for crude itself is contingent on so many nuanced factors. So, the economy might continue benefiting and the Saudis may continue losing.”
In that case, Riyadh deserves an advance thank you.
Disclaimer: Barani Krishnan does not own or hold a position in the securities he writes about.