WTI crude oil futures plunged on Mar. 18 to around $20/bbl for the first time since 2002. Brent crude oil futures dropped to a 16-year low below $25/bbl.
Oil has been hit on both the supply and demand sides. Saudi Arabia and Russia are preparing to increase production, and a slowdown in global travel and business activity due to coronavirus is suppressing demand.
"The oil demand collapse from the spreading coronavirus looks increasingly sharp," Goldman Sachs said, forecasting Brent crude prices to fall to $20/bbl in the second quarter, a level not seen since early 2002
As governments around the world urge residents to restrict gathering and isolate themselves, global oil demand may fall by as much as 8-9 million b/d by the end of March, Goldman Sachs said. The annual drop may reach a record-high 1.1 million b/d.
IHS Markit predicted oil demand in March and April would be reduced by 10 million b/d. Global oil supply surplus on a monthly basis could range from 4-10 million b/d from February to May, translating to an inventory build of 800 million bbl to 1.3 billion bbl in the first 6 months of the year.
“The last time that there was a global surplus of this magnitude was never. Prior to this the largest 6-month global surplus this century was 360 million bbl. What is coming will be twice that or more,” said Jim Burkhard, vice president of IHS Markit.
Abhi Rajendran, head of research at Energy Intelligence, said that the bottom of crude oil prices is likely to be $12 and very close to $10. In a week or two, an oversupply of more than 10 million b/d will be seen in the global market.
According to S&P Global Platts, the market hasn't seen the worst. If there is no OPEC+ production reduction agreement reached by April, members can freely increase production with large supply hitting the market.
US crude oil inventories for the week ended Mar. 13, excluding the Strategic Petroleum Reserve, increased by 2.0 million bbl from the previous week, according to data from the US Energy Information Administration. At 453.7 million bbl, US crude oil inventories about 3% below the 5-year average for this time of year, the EIA report indicated.
The shale industry will face billions of dollars of debt defaults, and millions of people directly and indirectly employed by the shale industry are at risk of unemployment.
Reuters analyzed field data provided by consulting firm Rystad Energy and stated that only 16 US shale oil companies’ new well production cost is less than $35/bbl.
A review of the price war
Saudi Arabia is the world's largest exporter of crude oil. In the past few months, it strictly followed the production reduction agreement and even cut production excessively, resulting in a drop in crude oil production to 9.7 million b/d.
To cope with the shrinking global oil demand caused by the spreading coronavirus, Saudi Arabia has proposed a larger-scale production reduction plan of 1.5 million b/d.
At the OPEC+ meeting on Mar. 6, Russia formally rejected the production reduction alternative. OPEC's accompanying oil-producing allies have not reached a new production reduction agreement, and the existing plan is set to expire at the end of the month.
On Mar. 7, Saudi Arabia started a price war, hoping to recoup lost market share by reducing prices and increasing production, possibly bringing Russia back to the table.
On Mar. 9, the price of WTI crude fell below $30/bbl, a decline of more than 30%, refreshing the largest one-day drop since the 1991 Gulf War. Brent crude reached a low of $32.27/bbl, a decline of 28.8%.
On Mar. 10, Saudi Arabia said its April crude oil supply increased to 12.3 million b/d. The following day, it said it would increase its maximum crude oil production capacity to 13 million b/d from 12 million b/d.
Russia responded, noting its ability to increase oil production by 500,000 b/d to a record 11.8 million b/d.
