By Myra P. Saefong, MarketWatch
MarketWatch photo illustration/iStockphoto
Oil prices dropped by more than half in March to suffer their largest quarterly percentage decline on record, and analysts warn that there’s no end in sight to the flood of crude supplies.
“If the first quarter was a bloodbath, the next quarter will be the Valley of Death,” said Michael Lynch, president of Strategic Energy & Economic Research.
‘If the first quarter was a bloodbath, the next quarter will be the Valley of Death.’
Michael Lynch, Strategic Energy & Economic Research
“The murmurs from Moscow, Washington and Riyadh don’t seem to be hopeful as of yet, and the COVID19 pandemic seems likely to kill over 25 [million barrels a day of oil] demand for at least a couple of weeks—meaning an unused amount of oil on the order of 300 million barrels,” he told MarketWatch. “It would take over three quarter of a million barrels a day inventory draw to remove that overhang from the market.”
Looking ahead, futures prices may “flatten out close to $20,” said Lynch. However, some barrels may sell at $10 or less “depending on quality (oil sands) and isolation (lack of storage and/or pipeline capacity.”
On Tuesday, May West Texas Intermediate crude /zigman2/quotes/209724760/delayed CLK20 -8.67% settled at $20.48 a barrel on the New York Mercantile Exchange. Front-month prices lost 54.2% for the month, according to Dow Jones Market Data. They posted a drop of 66.5% for the quarter.
On its expiration day, May Brent crude settled at $22.74 a barrel on ICE Futures Europe, losing 55% for the month and 65.6% for the quarter.
Both WTI and Brent saw their biggest quarterly percentage declines on record, based on data going back to the 1980s.
Prices for both benchmarks on Monday posted their lowest settlements since 2002.
“We’ve had a perfect storm on both the demand and supply side of the picture,” leading to the hefty declines for oil prices, said Matt Smith, director of commodity research at ClipperData.
“The coronavirus has absolutely crushed demand—sequentially from Asia to Europe and now the US,” he told MarketWatch. “And rather than seeing lower oil flows as refineries dial back across the globe, the crude market is about to be flooded by Saudi et al.,” he said.
He was referring to the supply increases from Saudi Arabia and Russia amid a price war that began when the producers in early March failed to reach an agreement to cut more production from global markets.
“Total global floating storage of crude and products has seen ripping higher over the last month—and is set to only grow given the contango see across the various commodities,” said Smith. In contango, prices for future delivery rise above the spot market, which can encourage traders to store oil.
There have been signs of hope in recent days, with President Donald Trump showing concern over the size of the drop in oil prices.
Trump spoke by phone with Russian President Vladimir Putin on Monday about the latest developments and efforts to combat the coronavirus, according to a statement from The White House. They both agreed on the importance of stability in the global energy markets and to work together through the G-20 to defeat the virus.
While Trump “appears to think oil prices have fallen too far, perhaps because he realizes the devastation to shale producers in Texas and North Dakota, [Saudi Arabia] may not be through with its effort to squeeze Russia and the shale patch,” said Marshall Steeves, energy markets analyst at IHS Markit.
For WTI, Steeves said he’s eyeing the 2001 low of $17.15 a barrel and below that, the 1998 low of $10.35.