The oil market is in a race against time.
The postponement of an emergency summit Monday to discuss unprecedented global supply cuts means producers are more likely to lose that race. As the world’s leading exporters, Saudi Arabia and Russia, continue to trade barbs, a global glut of crude is expanding.
Planes are grounded, streets are empty and factories are shut. That adds up to a huge fall in demand for oil. But producers in many cases haven’t curtailed production.
Now investors say the world could run out of storage for its excess oil in just a few months. Tankers of crude are floating at sea with nowhere to go. And energy companies—which collectively have hundreds of billions of dollars in debt maturing in coming years—are starting to file for bankruptcy.
Many traders remain skeptical that even an end to a production feud between Saudi Arabia and Russia would give prices a long-term boost. But investors say it could at least help stop the energy sector’s downward spiral. As an initial measure to address the ballooning coronavirus crisis, they are desperate to see massive cuts to global supply.
Prices recovered some ground late last week after President Trump hinted the Saudi-Russia spat could end soon. Officials of the Organization of the Petroleum Exporting Countries then called for Monday’s meeting, but its delay, resulting from discord between Saudi Arabia and Russia and a lack of commitment from U.S. companies about output cuts, could pressure oil prices again. The group is now set to convene on Thursday.
Shawn Reynolds, portfolio manager for investment firm VanEck’s natural-resources equity strategies, said he isn’t ready to boost his holdings of energy assets. He has slashed his investments in the sector to the smallest allocation he has ever had. Mr. Reynolds said he wants to see clarity on the pandemic and more details on supply curbs before he even considers increasing it again.
“Just to stop the carnage, you want to see some rationality brought back to the market,” he said. “Everybody is just getting killed.”
Brent crude, the global gauge of oil prices, ended the week at $34.11 a barrel after sliding on Tuesday to $22.74, its lowest level since 2002. That day, it closed out a 55% March drop that was its largest ever in data going back to 1988.
The S&P 500 energy group, meanwhile, plunged 51% in the first quarter, the biggest quarterly decline ever recorded by any of the index’s sectors in figures going back to 1989. Investors have also sold high-yield energy bonds, sending yields skyrocketing in another sign of distress.
Energy shares have clawed back some of their losses recently and were the stock market’s best-performing group last week, making the sector a focus for traders moving forward.
The oil market’s meltdown is imperiling crude-producing economies from Nigeria to Venezuela that don’t have the capacity to increase output as Saudi Arabia does. U.S. shale companies are also under pressure.
Denver-based Whiting Petroleum Corp. filed for bankruptcy protection last week. Many other producers, from Chevron Corp. to Diamondback Energy Inc., are pledging to lower spending, adding to the economic threat from the coronavirus. Some are even urging Texas regulators to curtail the state’s output for the first time in decades.
Analysts said those measures won’t even come close to bringing supply down to meet reduced demand. But they do mark necessary initial steps. President Trump held calls with Russian President Vladimir Putin and Saudi Arabian Crown Prince Mohammed bin Salman last week before meeting Friday with U.S. energy industry executives about possible aid to the industry.
Some investors are hoping for swift action from all parties after a deal between OPEC and Russia to cut output fell apart last month in Vienna.
The breakup of the OPEC alliance is helping to flood the world with cheap oil that no one can consume because of travel restrictions designed to stop the spread of the coronavirus. And as analysts continue crunching numbers on a historic drop in fuel demand, estimates for the daily decline in oil consumption keep rising into the tens of millions of barrels.
“The more data we get, it seems like the less oil is being used,” said Noah Barrett, an energy analyst for Janus Henderson Investors. “It’s just incredibly hard to model.”
To make matters worse, analysts estimate that roughly 70% of the world’s commercial and strategic stockpiles of crude oil are already filled. As companies try to store oil and ride out the crisis, traders said inventories could soon be filled to the brim. That could force some firms actually to pay buyers to take away their excess crude.
Such a dire possibility is adding even more pressure on producers and policy makers to act.
“The sense of urgency is building,” said Jason Bordoff, a former Obama administration energy adviser and the founding director of Columbia University’s Center on Global Energy Policy. “Nobody wants to be seen to blink first in this game of oil-price-war chicken…but I don’t think anyone—including the Saudis and the Russians—is happy with how the oil market looks right now.”
Hedge funds and other speculative investors are extremely cautious about a rebound. They lowered net bets on higher Brent prices by 80% during the four weeks ended March 24, Intercontinental Exchange data show. The crash has been briefly interrupted by sharp rebounds, only for prices to turn lower again.
“When it moves, it moves as a tsunami,” said Donald Morton, a senior vice president at Herbert J. Sims & Co. who oversees an energy trading desk in Haverhill, Mass. He has been a trader for about 40 years and has seen moves this violent only during the first Gulf War in the early 1990s. “All hell breaks loose,” he said.
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Some analysts remain skeptical that OPEC and Russia will reach a large-enough deal to balance supply and demand. Saudi Arabia, the de facto head of OPEC, has the infrastructure and capacity to outlast producers in a price war. With a more diversified economy, Russia could also likely survive the battle longer than many other countries.
Many U.S. energy companies are part of the group caught in the middle. They are now scrambling to respond.
“Just how quickly the picture darkened is stunning,” said Helima Croft, global head of commodity strategy at RBC Capital Markets. She has made a few trips to Saudi Arabia in the past few months and was in Vienna in early March when the kingdom and Russia couldn’t agree to output cuts, splintering their roughly four-year alliance. “Watching it up close was unbelievable,” she said.
—Sam Goldfarb contributed to this article.
Write to Amrith Ramkumar at amrith.ramkumar@wsj.com
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