GS Goldman Sachs Group Inc

By David Hodari 

U.S. crude prices fell to their lowest level since 2002, briefly dropping below $20 a barrel, as investors grew more pessimistic about oil demand.

West Texas Intermediate futures, the main U.S. crude gauge, were down 6.5% at $20.11 a barrel after hitting their lowest level since February 2002 on Monday. Brent crude, the global benchmark, fell 6.4% to $26.18 a barrel.

Both major benchmarks have shed roughly half of their value since the start of March, with lockdowns across Europe and North America to halt the spread of the coronavirus prompting investors to dump oil futures and equities and banks to slash their demand forecasts.

The latest major downgrade came Monday from Goldman Sachs, which estimated that oil demand this week will have fallen by 26 million barrels a day, or 25%, during the crisis.

Given the market's expectations for oil demand to continue to decline until the return of normal economic activity, oil prices are still too high, according to Edward Marshall, a commodities trader at Global Risk Management.

"I think there's too much hope in other financial markets -- people are posturing for the bottom and as the tail of Covid-19 gets fatter more analysts are going to have to bring down their oil demand numbers for May and June," Mr. Marshall said. "At that point we could see sub-$20-a-barrel Brent."

At the same time, there appeared to be no end in sight to the price spat between Russia and Saudi Arabia that erupted earlier in March when the two major producers failed to agree on production cuts. Saudi officials last week denied any contact with Moscow over an end to tensions.

Now, though, the impact of the coronavirus on oil markets has been so seismic that even a renewed deal between the two powers, or significant production cuts across oil markets, would unlikely boost prices, analysts say.

"The potential supply shortage which will be caused by producers shutting in production will not be enough and I don't think it will have any price supportive action in the next three months," said Tamas Varga, an analyst at brokerage PVM Oil Associates. "All in all, the situation is dire."

Such is the scale of the expected surplus, the discount of front-month Brent crude futures contracts for May and June widened to its largest since the last financial crisis.

The disruption will cause refiners to cut back on activity and higher-cost producers to fight for their financial lives, Mr. Varga said.

Investors have zeroed in on non-OPEC producers as the areas likely to undergo the most stress, with oil prices currently far below the $35.90 it cost U.S. producers to extract a barrel of oil from the ground in 2019, according to Rystad Energy.

Prices are also well short of production costs in other major producing nations such as Russia, Canada and Brazil.

The magnitude of the shut-ins to come "will likely permanently alter the energy industry and its geopolitics, restrict demand as economic activity normalizes and shift the debate around climate change," said Jeffrey Currie, head of commodities research at Goldman Sachs, in a note.

Write to David Hodari at David.Hodari@dowjones.com

(END) Dow Jones Newswires

March 30, 2020 08:34 ET (12:34 GMT)

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