U.S. Oil Prices Drop to Lowest Level Since 2002
March 30 2020 - 8:49AM
Dow Jones News
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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