Oil Prices Collapse Again After Worst Week Since 1991

Coming off its worst week since 1991, oil prices collapsed as much as 8% again last night before making a modest recovery. The price of West Texas Intermediate (WTI) crude fell settled at $22.37/barrel, down a modest 1.15% overall. Brent crude also traded lower, down 4.6% to $25.73 per barrel.

The energy sector continues to be roiled by a downturn in demand as travel slows and business activity drops due to the coronavirus outbreak and the looming supply increase scheduled for April 1 as Saudi Arabia and Russia both intend to ramp up production after the current OPEC+ agreement ends.

Giovanni Serio, head of research at Vitol, the world’s biggest oil trader, says demand is expected to fall by more than 10 million barrels per day (bpd) or roughly 10%. 

Even in the face of this sizable drop in demand, Saudi Arabia said it plans to increase daily production roughly 25% from 9.7 million/bpd to 12.3 million/bpd starting April 1. Russia has announced it will increase production as well, although the exact amount remains unknown.

With the April 1 production increase fast approaching, it appears the likelihood of a settlement between Saudi Arabia and Russia dwindles.

According to those with knowledge of the situation in the Kremlin, President Vladimir Putin views what Saudi Arabia is doing as “blackmail” and won’t likely agree to a resolution.

Joseph McMonigle, senior energy policy analyst at Hedgeye Potomac Research said in a recent note: “We believe oil prices will continue to fall into the teens in the short term amid disaster demand destruction, building global stocks and no production limits after April 1.”

Stephen Innes, chief Asia market strategist at Axicorp Ltd. added “Oil could head to $10 to $15 a barrel very quickly” if OPEC and Texas can’t reach an agreement on cutting production. Any traders with the capacity to store oil are probably putting their hands up, looking at the contango.”

Prices have swung wildly in the last week as traders try to understand the impact the quarantine orders and increased production come April 1 will have on the oil markets in the short-term.

On Wednesday prices fell 24.4% to an 18-year low, the third-worst decline in history. On Thursday, just one day later, prices climbed 23.8% for the largest single-day percentage gain ever.

“With each day there seems to be yet another trapdoor lying beneath oil prices, and we expect to see prices continue to roil until a cost equilibrium is reached and production is shut in,” said Louise Dickson, and analyst at Rystad Energy.

“This is the most dismal oil demand picture we have witnessed in a long time with a simultaneous collapse in jet fuel, gasoline, shipping fuel, petrochemicals, and oil used for power generation,” she added.

The price of WTI has decline 60% this year, and 43.9% in March alone, putting it on pace for it’s worst month on record since the contract was first offered in 1983.