Global oil prices slumped to fresh 18-year lows Monday, pulling U.S. crude under $20 a barrel in early European trading amid a 'perfect storm' of near record production rates and a coronavirus-lead collapse in world demand.
The ongoing disruption to the global economy from the coronavirus pandemic, which has triggered factory and business closures, social distancing orders and travel restrictions across the world's biggest economies, has pummeled energy demand in advance of what JPMorgan economists predict could be a 10.5% contraction for the global economy over the first half of the year.
At the same time, crude output is set to surge in the coming days as Saudi Arabia vows to turn on the taps following the collapse of a three-year production cut agreement among OPEC members earlier this month and its ongoing price war with non-OPEC ally Russia.
“We’ve got a perfect storm in the oil market right now," said Ole Hansen of Saxo Bank, noting that a report from Goldman Sachs last week suggested that around 90% of global GDP is currently being affected, in some way, by social distancing measures. "They’re seeing reduced demand in the region of 26 million barrels per day," he added. "There’s just no defence that oil prices can put up against numbers like that.”
Brent crude futures contracts for May delivery, the benchmark reference for around 60% of global crude purchases, were last seen $2.27 from their Friday closing price in New York and changing hands at $222.66 per barrel in early European trading.
WTI crude futures for May delivery, which are more tightly connected to domestic gas prices, were marked $1.39 lower at $20.12 per barrel, after briefly trading below $20 a barrel for the first time since February 2002.
Crude prices were also pressured by a late Friday report that suggested the U.S. Energy Department is looking for money from its existing budget to buy 77 million barrels of oil to fill the nation's strategic petroleum reserve after the funding was not included in yesterday's $2.2 trillion coronavirus stimulus plan.
President Donald Trump had instructed the Energy Department to "purchase, at a very good price, large quantities of crude oil for storage in the U.S. strategic reserve", telling reporters at the White House he was going to "fill it right to the top".
Crude traders, however, do seem to be betting on a second half rebound in oil, with futures contracts structured in a so-called 'contango', a condition where commodity prices for future delivery dates are priced higher than those for immediate delivery.
U.S. oil major stocks, however, have yet to suggest that investors are looking for a similar recovery, particularly given the fact that Energy Department figures suggest a price of around $46 dollars a barrel is needed to justify the drilling of new wells for near-term delivery.
ExxonMobil (XOM) - Get Report shares, which have fallen nearly 50% so far this year, were marked 1% lower in pre-market trading at $36.60 each while rival Chevron Corp. (CVX) - Get Report were last seen 0.9% lower at $68.16 per barrel.
U.S. gasoline prices, meanwhile, have fallen below $2 a gallon around most of the country, according to consumer advocate Gasbuddy.com, and could dip below $1 in the months ahead.
“We’re experiencing one of the biggest historical collapses in gas prices, including the Great Recession of 2008,” said Patrick DeHaan, head of petroleum analysis for GasBuddy. “World demand for oil has plummeted virtually overnight while domestic demand for gasoline continues to fall off a cliff with more states implementing shelter-in-place orders."
"Prices will continue to fall in the days ahead with currently no end in sight. Motorists need not be in any hurry to fill up, and those who do should be shopping around as prices will continue to race lower," he added. "While some lucky Americans may be able to fill for 99 cents per gallon.”