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A floorhand works on an oil rig in the Bakken shale formation outside Watford City, North Dakota.
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Oil plummeted 12% to a nearly 18-year low on Wednesday as the coronavirus outbreak continues to sap demand for crude, and as rising fears of a global recession lead to fears of longer-term demand destruction.
U.S. West Texas Intermediate crude fell 11.3%, or $2.05, to trade at $23.86 per barrel, its lowest level since 2002.
International benchmark Brent crude shed 5.8%, or $1.66, to trade at $27.07 per barrel. Earlier Brent fell to its lowest level in more than 4 years.
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 OPEC+ production cuts currently in place expire on April 1, 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,” she added.
WTI and Brent are both on pace for their worst month ever, each down 45%.
On Tuesday, Goldman Sachs slashed its oil forecast for the second quarter, and now sees both WTI and Brent averaging $20 per barrel. The firm believes that oil use has fallen by eight 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 times 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.
OPEC+ talks unwind
After talks between OPEC and its allies, known as OPEC+, broke down earlier this month, Saudi Arabia announced plans to increase its daily production to a record 12.3 million barrels per day (bpd) in April. By comparison, the kingdom pumped roughly 9.7 million bpd in February. Russia is among the other OPEC+ nations that has said it, too, could ramp up production.
“Saudi Arabia has become a market arsonist, adding as much fuel as possible to the selling fire, in the form of a maximized capacity output scheme,” Again Capital’s John Kilduff said. “Prices are attempting to find a clearing level or bottom, which I sense will be around the $18.00 per barrel level for WTI,” he added.
As oil prices continue to slide, OPEC-member Iraq on Tuesday urged the 14-member cartel and its allies to hold an emergency meeting, according to a report from Reuters.
– CNBC’s Michael Bloom contributed reporting.
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