Oil prices have fallen to their lowest level in 17 years, dropping below $25 a barrel, as demand for fuel has been hit by work and travel lockdowns introduced in some of the world’s biggest economies as part of efforts to contain the spread of coronavirus.
International benchmark Brent crude shed 14.1%, or $4.07, to trade at $24.67, its lowest level since 2003.
Oil is getting hit on both the supply and demand side. A slowdown in worldwide travel and business activity is weighing on demand, just as powerhouse producers Saudi Arabia and Russia prepare to ramp up production.
“The oil market is about to flood with surplus barrels,” Bank of America said in a note to clients Wednesday.
As demand grinds to a halt, the OPEC+ production cuts currently in place expire at the end of the month, meaning nations will soon be allowed to pump as much as they please.
“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 Rystad Energy analyst Louise Dickson.
“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.”
The Oil Demand Across the World Has gone Down as Countries Go on Lock down
WTI and Brent crude are on pace for their worst month ever, down 54% and 50%, respectively.
On Tuesday, Goldman Sachs slashed its oil forecast for the second quarter, now seeing WTI and Brent averaging $20 per barrel. The firm believes oil use has fallen by 8 million barrels per day. “Demand losses across the complex are now unprecedented,” Jeffrey Currie, the firm’s global head of commodities research, said in a note to clients.
Unlike prior periods of economic turmoil, including the financial crisis in 2008, the long-term impact of coronavirus is still very much unknown. With more and more market watchers saying a recession looks likely, oil prices could have much further to fall.
“Looking ahead, the path of least resistance is decidedly lower right now and the lower-for-longer dynamic appears to be one that is here to stay for a while, given the clearly bearish fundamentals pointing to a likely longstanding surplus in the global oil markets,” said Tom Essaye, co-founder of The Sevens Report.
Crude has now collapsed by more than half in a little over two weeks, with weak demand exacerbated by a price war between Saudi Arabia and Russia, which are raising supplies just as consumption falls dramatically. The two had previously co-operated on crude output but fell out over Riyadh’s calls for greater production cuts to boost the price.
Russia admitted on Wednesday it would like higher oil prices as it revealed that the recent crash meant it would run a budget deficit this year, but gave little indication it plans to pull back from its confrontation with Saudi Arabia in the oil market. The kingdom reiterated that it would continue to increase supplies in the coming months, maintaining its commitment to increase them by roughly a quarter to 12.3m barrels a day — even as demand falls in the face of the coronavirus pandemic.
With coronavirus continuing to spread far and beyond in the world, it is uncertain how much longer it will take for the demand to normalize and when prices will go back up.
At the moment, countries are going on lock down with different countries encouraging their citizens to stay at home and limit movements as precaution to limit the spread of the virus that is claiming so many lives.
Author: Moses Echodu
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