United States benchmark crude collapsed more than 24 percent and global benchmark Brent flirted with 2003 levels on Wednesday as analysts warned of a “gnarly” combo of crippled demand and growing supply while governments worldwide scrambled to save a global economy from coronavirus pandemonium
US West Texas Intermediate (WTI) crude on Wednesday lost as much as $6.58, or 24 percent before clawing back to around $22 a barrel. WTI prices have nosedived more than 50 percent over the last 10 days. Brent crude lost 13.4 percent to settle at $24.88 a barrel after dropping as low as $24.52 – the weakest in 17 years.
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The last time Brent traded around these prices was in 2003, when the US invaded Iraq. China was beginning its ascension to global economic powerhouse, helping to drive the world’s oil consumption to record highs in the coming years.
That has now flipped on its head.
In the last two months, coronavirus delivered a demand shock to the global oil markets as China shuttered factories, halted trade and quarantinied millions of its citizens in the fight against the pandemic.
Then came the failure of the Organization of Petroleum Exporting Countries (OPEC) and its biggest ally, Russia, to agree to curb output to offset a global glut in crude supply. The cartel’s kingpin, Saudi Arabia reacted by firing the first shots in an oil price war, announcing it would lift all production curbs and start pumping full tilt, flooding an already saturated oil market.
“We are caught between two crises,” Gregory Gause, Head of International Affairs at the Bush School of Government and Public Service at Texas A&M University, told Al Jazeera.
“One is man-made: the inability of Russia and Saudi Arabia to come to an agreement. The other is more a force of nature at this point. Obviously there is extreme downside pressure on demand from the virus. Nothing in the short term can change that,” said Gause.
As the virus spreads through Europe and the Americas, closing borders, grounding flights, and shutting businesses, analysts warn the unprecedented shock to oil demand will intensify.
Goldman Sachs on Tuesday forecasted demand will fall by 8 million barrels per day (bpd) by late March and said that Brent crude could fall as low as $20 a barrel in the second quarter- a level unseen since 2002.
“The oil demand collapse from the spreading coronavirus looks increasingly sharp,” Goldman Sachs analysts wrote in a note.
The world’s richest countries are activating trillions of dollars in stimulus packages to cushion the economic shock of coronavirus. Airline officials say the global industry may need up to $200bn in government aid to avoid total collapse.
Meanwhile, on Wednesday Saudi Arabia’s Energy Minister said oil giant Aramco would continue supplying crude oil at a record rate of 12.3 million bpd over the coming months. While the Saudis also announced a nearly 5 percent [$13bn] cut in the state’s 2020 budget, they indicated that they could live with low oil prices for a while.
The Kremlin on Wednesday said Russia would like to see oil prices higher than current levels.
“If WTI at $20 per barrel does not put the fear of God into the hearts of people in the Permian, in Moscow and in Riyadh, I am not sure what will,” Gause told Al Jazeera.
As much as 3 million bpd of extra oil are expected to hit the market in April, while year over year demand for the month will contract by 1 million bpd, research firm Rystad Energy estimates.
“We are staring at a global liquids balance that has implied stock builds of 10 million barrels per day in the second quarter- absolutely unprecedented and a gnarly combo with the worsening oil demand prognosis,” Rystad analyst, Louise Dickson, told Al Jazeera.
“The fallout from the coronavirus is far from over,” she added.