Both Brent and West Texas Intermediate crude futures settled below $25 on Wednesday, marking a new milestone in a selloff that has taken even the most bearish analysts by surprise.
Brent crude futures, the international benchmark, fell 13% to $24.88, their lowest closing level since May 2003. WTI plunged 24% to $20.37, its lowest level since 2002. In the past month, both benchmarks have been cut in half.
Analysts have been warning that the oil price drop brought on by simultaneous supply and demand shocks will cut deep and last a long time. Saudi Arabia, Russia, and other nations are ramping up production just as the coronavirus causes economies around the world to grind to a halt. As recently as last month, demand was expected to grow by at least 1 million barrels in 2020.
Now, Goldman Sachs expects it to fall by 1.1 million barrels for the year, the largest drop in history, according to analyst Damien Courvalin. Demand could fall by 8 million barrels in the second quarter, Courvalin estimates. The U.S. and other countries are buying crude to place into storage, but those actions are unlikely to stop the declines in price.
Eventually, the price will fall to the “cash costs” of U.S. and Canadian producers, some of which will have to stop drilling to get the market back into balance in the next year.
“Ultimately, such a fall to cash costs would be consistent with the prior large bear markets of 1999, 2009, and 2016, when total storage capacity was never reached but local logistical saturation proved binding,” Courvalin wrote.
Others see oil prices falling below $20.
“Sub-$20 oil is a distinct possibility as the crisis intensifies over the coming weeks, as excess supply grows and storage is filled up,” said Jack Allardyce, oil and gas analyst at Cantor Fitzgerald Europe. Allardyce expects prices to eventually bounce back, though he doesn’t specify when that could happen. “While Saudi Arabia may be able to pump oil at these levels, given its low cost of production and cash reserves, we would expect the fiscal pain brought about by the continuing price collapse to bring about the resumption of negotiations with other major producers, including Russia.”
Large companies are already announcing changes to their capital spending, with ConocoPhillips (ticker: COP) saying on Wednesday that it would cut capital spending by 10%. Hess (HES) said on Tuesday it was reducing its 2020 capital budget by 27%. And Exxon Mobil (XOM) also said this week it planned to cut, though it did not specify the magnitude.
Write to Avi Salzman at avi.salzman@barrons.com
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March 19, 2020 at 04:22AM
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U.S. Oil Plunges 8% to $25 a Barrel - Barron's
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