Oil slammed by price war and virus in worst loss since 1991
Oil plunged as both Russia and Saudi Arabia stood poised to flood the market with cheap crude in an all-out price war just as the coronavirus is spurring the first contraction in demand since 2009.
The former allies pledged swift retribution for the collapse of the OPEC+ alliance meeting last week. The Gulf kingdom has slashed its official crude prices and is threatening record output. Russia's largest producer, meanwhile, said it will ramp up production next month. Oil futures fell more 30% in New York and London on Monday, the biggest drop since the Gulf War in 1991, before pulling back to around a 20% decline.
The freefall ricocheted across financial markets. U.S. stocks plunged almost 6% with the S&P 500 index down 18% from its Feb. 19 all-time high. All of the annual growth the International Energy Agency had anticipated last month -- just over 800,000 barrels a day -- has been wiped out and demand is now expected to contract by 90,000 barrels a day.
"The situation we are witnessing today seems to have no equal in oil market history," said IEA Executive Director Fatih Birol. "A combination of a massive supply overhang and a significant demand shock at the same time."
The cataclysmic price collapse will resonate through the energy industry, from giants like Exxon Mobil Corp. to smaller shale drillers in West Texas. It will hit the budgets of oil-dependent nations from Iraq to Nigeria and could also reshape global politics, eroding the influence of countries like Saudi Arabia. The fight against climate change may suffer a setback as fossil fuels become more competitive against renewable energy.
"Markets are bracing for oil prices in the 20s," said Ellen Wald, president of Transversal Consulting and a nonresident fellow at the Atlantic Council's Global Energy Center. "I don't think production can win this war. There's not enough demand for it. That's the difference between 2014 and today."
Brent for May settlement tumbled as much as $14.25 a barrel to $31.02 on the London-based ICE Futures Europe Exchange. West Texas Intermediate crude for April slumped as much as 34% to $27.34 a barrel on the New York Mercantile Exchange, before paring losses to 19%.
"It's just a nightmare," said Tamas Varga, an analyst at PVM Oil Associates Ltd. in London.
Hammered by withering demand due to the coronavirus, the oil market is sinking deeper into chaos on the prospect of a supply free-for-all. Saudi Arabia slashed its official prices by the most in at least 20 years over the weekend and signaled an unambiguous declaration of intent to flood the market with crude.
The state-owned Saudi producer has privately told some market participants it plans to raise output well above 10 million barrels a day next month and could even reach a record 12 million a day, according to people familiar with the conversations, who asked not to be named to protect commercial relations.
Russia's state oil company Rosneft PJSC is planning to lift oil production as soon as the current OPEC+ deal ends, according to a person close to the company. That suggests the company could start ramping up output on April 1 and add 300,000 barrels a day within weeks of that date.
Oil prices have suffered massive drops each time Saudi Arabia has launched a price war to drive competitors out of the market. WTI fell 66% from late 1985 to March 1986 when the country pumped at will amid a resurgence of U.S. oil output. Brent crude briefly dipped below $10 a barrel when the kingdom had a showdown with Venezuela in the late 1990s.
With oil demand already plummeting due to the economic impact of the coronavirus, traders forecast that prices will go even lower. The oil market is now faced with two highly uncertain bearish shocks with the clear outcome of a sharp price sell-off," said Jeffrey Currie, head of commodities research at Goldman Sachs Group Inc. in New York.
While the price crash has been dramatic, for oil specialists the movements in time-spreads, options and volatility are just as remarkable. Brent's three-month price structure widened sharply as oil for prompt delivery collapsed against later shipments.
It moved deeper into contango, a sign of bearishness and oversupply, making it profitable for physical traders to buy crude and put it into storage, either in onshore tank farms or at sea on tankers.
