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Oil futures declined Tuesday, extending losses from a day earlier to post another four-year low, as traders focused on expectations for a massive hit to demand from the global spread of COVID-19, and an increase in supply as Russia and Saudi Arabia engage in a global price war.
On the supply front, IHS Markit is projecting that global oil supply surplus on a monthly basis could range from four million barrels per day to 10 million barrels per day from February to May 2020, said Marshall Steeves, energy markets analyst at IHS Markit.
“Thus, if Saudi Arabia goes ahead with its plan to massively increase output in April, they will be doing so just as demand is retreating globally because of all the lockdowns due to the coronavirus,” he told MarketWatch.
The U.S. benchmark, West Texas Intermediate crude for April delivery CL.1, -5.89% fell by $1.75, or 6.1%, to settle at $26.95 a barrel on the New York Mercantile Exchange. That was the lowest front-month contract finish since February 2016, according to Dow Jones Market Data.
May Brent crude BRN.1, -0.17%, the global benchmark, lost $1.32, or 4.4%, at $28.73 a barrel on ICE Futures Europe—for the lowest settlement since January 2016.
“The massive demand destruction going forward will be a function of the duration and depth of the shutdowns,” said Steeves. The U.S. stock market plunged on Monday, and saw its third worst day in history, after President Donald Trump said it would “likely be July or August before this virus subsides. Thus nobody can really call a bottom before the number of cases peaks and recedes.”
A note from Societe Generale dated Tuesday warned that “oil demand destruction” will peak in the second quarter, with 5 million barrels a day of oil demand “destroyed in those three months.”
Most of the demand decline will come from countries that are part of the Organisation for Economic Cooperation and Development—in the Euro area, South Korea, Japan and the U.S., according to the note, though “oil consumption should gradually normalise and the catch up in demand” could be stronger than previously expected.
Meanwhile, Russia and Saudi Arabia show no signs of backing away from a price war initiated after Moscow rejected calls by the Organization of the Petroleum Exporting Countries for major producers to implement deeper production cuts.
“Given that demand is declining at the same time as a result of the increasingly drastic restrictions aimed at combating coronavirus, the behavior of the world’s second- and third-largest oil producers can be described as a wanton act of self-destruction,” said Carsten Fritsch, analyst at Commerzbank, in a note. “If the announced production increases are actually implemented, the price risks plunging further towards the $20 mark. We can only hope that common sense will ultimately prevail, though it there is no sign of this happening just now.”
The American Petroleum Institute will release its weekly estimate of U.S. petroleum inventories, with the more closely followed weekly data from the Energy Information Administration due on Wednesday. Analysts surveyed by S&P Global Platts, on average, expect the EIA report to show crude inventories rose 2.6 million barrels last week. They also forecast supply declines of 3.8 million barrels for gasoline and 3.2 million barrels for distillates.
On Nymex Tuesday, April gasoline RBJ20, +4.28% rose 3.1% to 71.14 cents a gallon, after a more than 23% plunge a day earlier. April heating oil HOJ20, -0.97% shed 1% to $1.0357 a gallon.
April natural gas NGJ20, -5.29% settled at $1.729 per million British thermal units, down 4.7%.
