Oil Gets Slaughtered On Demand Worries

Today is a historic day – oil prices have reached lows last seen in 2003. WTI oil trades close to $24 per barrel, while Brent oil is near $27 per barrel.

Concerns about demand are the main reason for the current downside. Goldman Sachs expects that demand for oil may fall by 8 million bbl/day by late March due to coronavirus containment measures. The firm also expects that the annual demand will ultimately fall by 1.1 million bbl/day.

In comparison, the recent OPEC Monthly Oil Market Report, which was published in early March, predicted that oil demand growth will be close to zero in 2020. That’s how fast the oil market expectations change nowadays.

Goldman Sachs stated that it expected to see Brent oil at $20 in the second quarter of this year. That’s not that far from current prices given the pace of the oil price decline. Should this prediction turn into reality, the WTI oil will likely trade even lower as it mostly trades at a discount to Brent.

It remains to be seen whether sharp declines in oil prices will bring Russia and Saudi Arabia back to the negotiation table. At this point, both countries are expected to increase production in April as the current OPEC deal ends while the negotiations about the new OPEC deal have collapsed, initially causing oil price to fall below $50 per barrel.

Russia can mitigate the impact of the falling oil prices by letting the Russian ruble fall, but no weakness of ruble can offset the oil price decline from the $50 level to the $20 level. In addition, the Russian Urals trades at a discount to Brent so the situation for Russia will be even more challenging.

As always nowadays, investors and traders should watch the virus containment measures announced by various countries to get a feel of where the oil demand is heading (U.S. President Trump will hold a press conference today). Currently, the situation on the coronavirus front gets worse day by day, and it is hard to predict how many days of lockdown will be required to stabilize the spread of the virus.

For example, Italy has recently stated that it may need to extend the current lockdown if the number of new coronavirus cases does not decrease. Other European countries may follow Italy’s example, putting even more pressure on the demand for energy.

In short, the fundamental situation in the oil market remains very challenging, and the ongoing panic is justified as supply is set to overwhelm demand in the coming months.