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Futures Movers: Oil taps lows under $20 a barrel as coronavirus crushes demand amid price war

Oil futures get the week off to an ugly start, with the U.S. benchmark dipping below the psychologically important $20-a-barrel level to trade at an 18-year low as the global COVID-19 pandemic crushes demand and a price war between Saudi Arabia and Russia floods the world with crude. Read More...

Oil futures fell sharply on Monday, with the U.S. benchmark dipping below the psychologically important $20-a-barrel level to trade at an 18-year low as the global COVID-19 pandemic crushes demand and a price war between Saudi Arabia and Russia floods the world with crude.

The physical oil market is “facing an unprecedented set of conditions. Demand has never fallen this much or this quickly, and storage capacity is going to be increasingly overwhelmed,” said Robbie Fraser, senior commodity analyst at Schneider Electric.

“So long as those conditions persist, the front end of the curve should come under sustained pressure, with a steeper contango signaling the scale of current oversupply, while also hanging on to optimism that longer-dated contracts could benefit from a an equally quick path to recovery once lockdown measures are eventually curtailed,” he said in a daily update. In contango, prices for future delivery rise above the spot market, which can encourage traders to store oil.

West Texas Intermediate crude for May delivery CLK20, -5.81%  fell $1.46, or 6.8%, to $20.05 a barrel on the New York Mercantile Exchange after trading as low as $19.92. The global benchmark, May Brent crude BRNK20, -9.87%  was down $2.13, or 8.5%, at $22.80 a barrel on ICE Futures Europe, ahead of the front-month contract’s expiration at Tuesday’s settlement.

For the month to date, WTI is off nearly 56%, based on the front month contract, while Brent is down about 54%. WTI is looking at its lowest finish since February 2002, while Brent is on track for the lowest settlement since November of the same year.

“This situation is clearly favorable for Saudi Arabia, who wanted to curtail production to support the oil markets despite being the cheapest producer among all producers, and hostile for Russia, who refused to do so,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank, in a Monday note. “Hence, oil prices so low increase the probability of Russia changing its mind and establishing a deal with the OPEC nations to stop the heavy bleeding.”

Saudi Arabia on Friday said it wasn’t in talks with Russia on oil output levels, news reports said, despite calls by the Trump administration for the two countries to end their spat, which has spawned an oil rout that is seen adding to financial market and global economic turmoil alongside the pandemic. Moscow in early March rejected calls by the Organization of the Petroleum Exporting Countries for the cartel and its allies to increase existing production curbs. The Saudis retaliated by slashing prices and moving to boost output as the two countries, and other major producers, jockey for market share.

“The coming weeks will see unprecedented pressure on oil producers. But the market is collapsing so fast, that it is really more about the logistical challenge to place oil and shut in production in a smart way, rather than the financial impact,” wrote analysts at JBC Energy, a Vienna-based consulting firm, in a Monday note.

See: The world is running out of tanks to store oil as coronavirus and price war lead to flood of crude

Concerns that Saudi Arabia can’t beat the financial impact of the rout appear misplaced, the analysts said, arguing he kingdom could “theoretically be the last man standing, given financial reserves and the ability to borrow money if necessary.

“For pretty much everybody else in the industry, including U.S. shale and Canadian oil-sand companies, it is set to be a much more existential threat, with months of lower production at prices close to zero,” they said.

‘Oil drillers have no choice but to stop in their tracks, cap the well and walk away and pray.’

Phil Flynn, The Price Futures Group

On Friday, Baker Hughes BKR, -5.72%  reported that the number of active U.S. rigs drilling for oil dropped by 40 to 624 for the week. That followed decline of 19 oil rigs the week before.

“According to market sources, next week will see the biggest drop in the US rig count in history,” said Phil Flynn, senior market analyst at The Price Futures Group, in market commentary. “Oil drillers have no choice but to stop in their tracks, cap the well and walk away and pray.”

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