Oil plummeted more than 11 percent on Monday with global benchmark Brent crude falling below $30 barrel after an emergency interest rate cut and other crisis measures by the United States Federal Reserve and its global counterparts failed to assuage rising fears over the global economic fallout of coronavirus.
Brent crude was down more than 12 percent at $29.69 a barrel, around 18:00 GMT, while US West Texas Intermediate (WTI) crude was off 9.5 percent to $28.71 a barrel, as more North American shale producers announced that they are cutting drilling activity and budgets.
This comes as a US energy department source told Reuters news agency that the US could begin purchasing US crude for the Strategic Petroleum Reserve as early as two weeks from now.
“Oil is at mercy of the coronavirus at this point,” Samantha Gross, an energy security fellow at the Brookings Institution, told Al Jazeera.
As more nations halt public life, shutter borders, and ground fights, Gross says the demand shock roiling energy markets will continue to intensify.
“It now depends on how people will feel as the virus recedes and things get back to normal. How long will people stay away from travel and work? When will they feel comfortable going back out? Will trade bounce back right away?”
“There are many questions we either do not have answers for – or the answers are very grim,” she added.
In China, industrial output dropped more than expected – 13.5 percent between January and February compared to last year, according to Reuters.
Refineries there significantly cut back on how much oil they process as factories shuttered and officials quarantined millions of citizens in hopes of combatting the coronavirus epidemic. Some analysts are concerned that the fall-off in crude demand from China is a harbinger of falling crude appetites on a global scale.
The oil price drop could also push many US crude producers into bankruptcy.
On Monday, Brent’s premium to WTI narrowed to less than $1, close to its narrowest since 2016, making US crude oil uncompetitive in international markets.
US President Donald Trump said on Friday that the US would fill the nation’s emergency crude oil reserve. The move is aimed at helping domestic energy producers suffering from the plunge in oil prices.
US companies EOG Resources Inc, Whiting Petroleum Corp and EQT Corp said on Monday that they have slashed drilling activity and budgets.
Meanwhile, the US Department of Energy has said the reserve, which has a capacity of 713 million barrels, can take an additional 77 million barrels of crude.
“Based on discussions with industry, we are confident that this can be filled within several months,” an Energy Department source told Reuters news agency.
Crude prices have been under immense pressure in recent weeks, hit by a demand shock spurred by the coronavirus outbreak and a supply glut set to worsen now that Saudi Arabia has declared an oil price war.
Last week, Saudi Arabia announced that it lifting limits on production and dropping prices to boost sales to Europe and Asia. That move was in response to failed talks between the Saudi-led Organization of the Petroleum Exporting Countries (OPEC) and Russia, which refused to back a deep cut in production to blunt the blow from coronavirus slowdowns.
Analysts say the current route could be worse than the oil price plunge of 2014 – especially for US shale oil producers given that their cost of production is much higher than that of Saudi Arabia and other Gulf producers.
“The price collapse of 2014 was in a good economy and now it is in a time of a crisis,” Mark Mills, senior fellow at the Manhattan Institute, told Al Jazeera. “US companies will go bankrupt but it depends how much the government will decide to extend terms to avoid bankruptcy.”
Storage capacity could also become a drag on oil prices, say analysts.
“As the coronavirus continues to weigh down demand many of the additional barrels pumped by OPEC might end up in storage rather than processed by a refiner. However, there is not enough spare storage capacity to keep up with the coming level of production,” Paola Rodriguez-Masiu, Rystad Energy’s Senior Analyst, told Al Jazeera.
“Oil could fall into the $20 territory to trigger necessary production shutdowns,” Rodriguez-Masiu added.
A spokesperson for the Kremlin on Monday said that Moscow did not have any immediate plans to sit down and talk to the Saudis.