Crude Oil in a Free Fall

Yesterday, 9 March 2020, is a day most crude oil traders will remember for a lifetime. After brutally gapping almost 20% lower compared to the previous week close of $41.56, US West Texas Intermediate (WTI) futures continued their early morning slide on Monday to touch $27.35, the lowest price since 12 February 2016. Similar was the case on the Brent oil market, where futures were down more than 30% in the early morning to touch $31.03, again the lowest since 12 February 2016.

The freshly started price war between two of the major oil producers, Saudi Arabia and Russia, resulted in oil’s biggest daily sell-off since the Gulf War in 1991. Saudi Arabia announced its plans to raise its crude output above 10 million barrels per day (bpd) in April, compared to the current 9.7 million bpd, as the current OPEC+ deal to constrain production expires at the end of this month. The kingdom also slashed its official selling prices. Russia reacted calmly to the news, saying that it could also easily lift output and endure low prices for up to 10 years.

OPEC, Russia and other major producers, forming the so-called OPEC+ group, had worked together for three years in a bid to limit supply. In the current situation, other members of the OPEC+ are expected to also lift output and cut prices, in order to keep their market share. This would further increase the supply in a market already awash with oil.

Further adding up to the downside pressure for crude is the severe outbreak of the coronavirus, which has already resulted in a significant reduction in demand. China, the second-largest economy and the number one oil importer has been putting some solid efforts in containing the contagion. This, in turn, has severely cut oil shipments to the country.

The International Energy Agency has been carefully monitoring the situation. According to their report, oil demand is set to contract in 2020 for the first time in eleven years. The agency slashed its annual forecast to reflect the current market state. According to the figures, oil demand would decrease by 90,000 bpd compared to last year.

The combination of factors described above promises to send crude prices even lower compared to the current levels. We expect Brent oil to break through the $30 psychological level and at least temporarily dip into the mid-20s area. In this scenario, the West Texas Intermediate could sink to as low as $20 and even beyond until it finds a more reliable support. All this will ultimately depend on the policies of major oil producers and on the impact the coronavirus has on global demand. Our advice is to watch out carefully how this story will unfold.