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Oil was in bounce mode Friday, rising sharply but still on track for the biggest weekly drop since 2008 due to a brutal selloff sparked by a Saudi-Russian price war and the global spread of the COVID-19 epidemic.
West Texas Intermediate crude for April delivery CL.1, +6.22% on the New York Mercantile Exchange rose $1.90, or 6%, $33.40 a barrel, while May Brent crude BRNK20, +6.50% was up $2.02, or 6.1%, at $35.24 a barrel. WTI was on track for a 19% weekly fall, while Brent is down 22%. Those would be the biggest weekly declines for both since the week ended Dec. 5, 2008.
Oil was hammered this week by a combination of growing fears over the demand hit from the coronavirus pandemic and Saudi Arabia’s launch of a price war against Russia that threatens to flood an already oversupplied market with more crude. President Donald Trump’s decision to impose restrictions on travel to the U.S. from Europe added to pressure Thursday given the hit to jet fuel demand.
Near-term oil contracts have moved to a steep discount against later months, a condition known as contango, reflecting large near-term supplies. The spread between May 2020 and May 2021 contract hit a five-year high of $9.85 for the 12-month spread, up from negative $2 a barrel on Feb. 21, noted Warren Patterson, head of commodities strategy at ING, in a note.
That spread may need to get steeper.
“We estimate that the market was already oversupplied by well over 3 mbd due to the incidental demand effects of COVID-19, and a structural increase in OPEC+ supply will not be easily absorbed,” said Jason Gammel, analyst at Jefferies, in a note.
“Contango will need to get increasingly steep to push [production] into storage and price discovery in an oversupplied commodity market is a difficult path,” he said.
The sharp decline in crude prices comes alongside a brutal equity selloff that saw the Dow Jones Industrial Average DJIA, -9.99% tumble into a bear market, defined as a 20% pullback from a recent peak, on Wednesday, with the S&P 500 SPX, -9.51% following suit on Thursday amid the largest one-day rout for equities since the October 1987 stock-market crash.
