Investors will be keeping an eye on oil prices today, with the WTI crude oil dipping to its lowest level since February 2002.
Context: After declining 23% last week, oil has continued its downward momentum this week. Prices tumbled 24% to an 18-year low level on Wednesday. This commodity has been under pressure with a steep decline in demand, amid travel bans and many countries imposing lockdowns.
Details: Oil prices are hit by a devastating combination of higher supply and falling demand. The spread of the coronavirus has hurt demand with various nations imposing travel restrictions and some going into lockdowns. Several flights have been cancelled with no projection of when their services may be resumed. The global supply chain has been disrupted and the lower movement of goods has caused a dent in demand. Various production facilities, many of which are oil consumers, have been asked to remain closed.
On the other hand, Saudi Arabia and Russia are embroiled in a price war. This couldn’t have come at a worse time, when the market was depending on these two large oil-producing nations to work together to stabilise prices. Russia had long nurtured a resentment of being arm-twisted by the OPEC to curbing production and allowing Saudi Arabia to gain a larger share of the market. Russia refused the OPEC’s latest request for production cuts and Saudi Arabia retorted by lowering its prices. Both countries need higher oil prices but are in no mood to surrender. The meeting of the OPEC+ technical committee, which was scheduled for yesterday, was cancelled.
Oil prices moved lower despite US President Donald Trump’s announcement last week of purchasing oil for the SPR (Strategic Petroleum Reserve). Stimulus plans by the US and Europe also didn’t help lift investor sentiment.
Meanwhile, the US EIA (Energy Information Administration) reported an eighth consecutive week of increase in crude supplies, adding 2 million barrels in the week ending March 13. Although the API (American Petroleum Institute) late Tuesday reported a decline of 421,000 barrels for the week. It didn’t help the cause.
US WTI crude tumbled 24.4% to settle at $20.37 a barrel on Wednesday, while Brent crude dipped 13.4% to close at $24.88 per barrel. WTI crude climbed 8% this morning to trade at $22.00 per barrel during the Asian session at 4:30am GMT.
Why it matters: With so signs of an end to travel restrictions and lockdowns, the outlook for oil looks bleak. Goldman Sachs has projected oil demand to decline by 1.1 million bpd (barrels per day) in 2020, with demand expected to contract by 8 million barrels in March. Research firm Rystad Energy has projected a steeper decline of 2.8 million bpd for 2020, with April demand expected to tumble by 11 million bpd.
What to watch: Markets await announcements from the OPEC+ related to its effort at controlling the current freefall in oil prices. Investors are also looking forward to the US reporting a decline in oil inventories. Any positive news related to the economy could support the oil market.
Other Markets: Most European markets closed lower on Wednesday, with the FTSE 100, German 30 and French 40 down 4.05%, 5.56% and 5.94%, respectively.