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March 30, 2020, 3:34 p.m. EDT

Oil ends at 18-year low after dipping below $20 a barrel

Coronavirus crushes demand amid oil price war

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By Myra P. Saefong and William Watts, MarketWatch

AFP/Getty Images

Oil futures posted their lowest settlement since 2002, with the U.S. benchmark briefly dipping below the psychologically important $20-a-barrel level, as the global COVID-19 pandemic crushes demand and a price war between Saudi Arabia and Russia floods the world with crude.

The physical oil market is “facing an unprecedented set of conditions. Demand has never fallen this much or this quickly, and storage capacity is going to be increasingly overwhelmed,” said Robbie Fraser, senior commodity analyst at Schneider Electric.

“So long as those conditions persist, the front end of the curve should come under sustained pressure, with a steeper contango signaling the scale of current oversupply, while also hanging on to optimism that longer-dated contracts could benefit from a an equally quick path to recovery once lockdown measures are eventually curtailed,” he said in a note. In contango, prices for future delivery rise above the spot market, which can encourage traders to store oil.

West Texas Intermediate crude for May delivery  fell $1.42, or 6.6%, to settle at $20.09 a barrel on the New York Mercantile Exchange after trading as low as $19.27. The global benchmark, May Brent crude  lost $2.17, or 8.7%, at $22.76 a barrel on ICE Futures Europe, ahead of the front-month contract’s expiration at Tuesday’s settlement.

WTI marked its lowest finish since February 2002, while Brent saw its lowest settlement since November of that year, according to Dow Jones Market Data.

/zigman2/quotes/211629951/delayed CL.1 84.27, +2.15, +2.62%

“With the global economy slowing to a standstill and consumer demand for refined products quickly evaporating,” $10 a barrel WTI, or even Brent prices are “by no means out of the question and could be looming right around the corner in early-to-mid Q2,” said Tyler Richey, co-editor at Sevens Report Research.

“How soon we could see prices cut in half from current levels (again) largely depends on how close we are to containing the coronavirus outbreak because only then will we see improvement in the demand side of the oil economics equation which should lead to some market stabilization,” he told MarketWatch.

For the month to date, WTI and Brent crude are both off by about 55%, based on the front month contracts.

“This situation is clearly favorable for Saudi Arabia, who wanted to curtail production to support the oil markets despite being the cheapest producer among all producers, and hostile for Russia, who refused to do so,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in a Monday note.

Saudi Arabia on Friday said it wasn’t in talks with Russia on oil output levels, news reports said , despite calls by the Trump administration for the two countries to end their spat, which has spawned an oil rout that is seen adding to financial market and global economic turmoil alongside the pandemic. Moscow in early March rejected calls by the Organization of the Petroleum Exporting Countries for the cartel and its allies to increase existing production curbs. The Saudis retaliated by slashing prices and moving to boost output as the two countries, and other major producers, jockey for market share.

President Donald Trump spoke with Russian President Vladimir Putin by phone on Monday and “agreed to work closely together through the G20 to drive the international campaign to defeat the virus and reinvigorate the global economy,” said White House Deputy Press Secretary Judd Deere, in a statement.

See: The world is running out of tanks to store oil as coronavirus and price war lead to flood of crude

Concerns that Saudi Arabia can’t beat the financial impact of the rout appear misplaced, analysts at JBC Energy, a Vienna-based consulting firm, in a Monday note, arguing the kingdom could “theoretically be the last man standing, given financial reserves and the ability to borrow money if necessary.

“For pretty much everybody else in the industry, including U.S. shale and Canadian oil-sand companies, it is set to be a much more existential threat, with months of lower production at prices close to zero,” they said.

‘Oil drillers have no choice but to stop in their tracks, cap the well and walk away and pray.’

Phil Flynn, The Price Futures Group

On Friday, Baker Hughes /zigman2/quotes/205323712/composite BKR +4.53%  reported that the number of active U.S. rigs drilling for oil dropped by 40 to 624 for the week. That followed decline of 19 oil rigs the week before.

“According to market sources, next week will see the biggest drop in the U.S. rig count in history,” said Phil Flynn, senior market analyst at The Price Futures Group, in market commentary. “Oil drillers have no choice but to stop in their tracks, cap the well and walk away and pray.”

Back on Nymex, April gasoline  added 2.1% to 58.55 cents a gallon and April heating oil  dropped 4.6% to $1.0194 a gallon. The April contracts expire at Tuesday’s settlement.

May natural gas  ended at $1.69 per million British thermal units, up 1.1%.

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Myra Saefong is a MarketWatch reporter based in San Francisco. Follow her on Twitter @MktwSaefong. William Watts is MarketWatch's deputy markets editor, based in New York. Follow him on Twitter @wlwatts.

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