By Barani Krishnan
Investing.com – With some 3 billion of the world’s population not driving, commuting or flying because of the Covid-19, oil has nowhere to go but down, accelerating its slide beneath $20 per barrel on Monday.
West Texas Intermediate, the New York-traded benchmark for U.S. crude prices, settled down $1.42, or 6.6%, at $20.09 per barrel. It earlier hit an 18-year low of $19.27.
London-traded Brent, the global benchmark for oil, fell $2.17, or 8.7%, to settle at $22.76.
“With the lockdowns extending geographically to India, the U.S. (and) now Russia, as well as extending in time in other regions, the focus has entirely shifted to demand destruction,” said Olivier Jakob of Zug, Switzerland-based oil risk consultancy Petromatrix.
“The size of it is so large that a sharp increase in stocks in refined products is inevitable, followed by a sharp decrease in refinery runs and sharp rise in crude oil stocks.”
Goldman Sachs (NYSE:GS) estimated that crude demand for this week will fall by 26 million barrels per day or 25% below norm.
“With social distancing measures now impacting 92% of global GDP, the ultimate magnitude of these shut-ins which is still unknown will likely permanently alter the energy industry and its geopolitics, restrict demand as economic activity normalizes and shift the debate around climate change,” analysts at the Wall Street firm, led by its commodities head Jeffrey Currie, wrote.
“Not only is this the largest economic shock of our lifetimes, but carbon-based industries like oil sit in the cross-hairs as they have historically served as the cornerstone of social interactions and globalization, the prevention of which are the main defense against the virus.”
In crude pricing, WTI has taken the bigger hit because of the fear that the production-and-price war between Saudi Arabia and Russia will lead to the systemic destruction of the U.S. shale oil industry, which produced a world high of 13 million bpd in February, of which about a quarter was exported.
Also weighing on U.S. crude was President Donald Trump’s decision on Sunday to extend the nation’s shutdown of non-essential businesses till the end of April at least, after initially toying with a reopen by Easter, which falls on April 19. Trump also acknowledged health experts’ view that more than one million Americans might get infected and up to 200,000 could be killed by the pandemic, despite the administration’s containment efforts.
If WTI doesn’t get to $40 by the year-end — and many analysts don’t think it will — some 30% or more of U.S. drillers could end belly up, regardless of their cuts in capital expenditure, exploration or outright production.
In terms of milestone headlines, however, the 18-year low may stay for a while. Should WTI get below the Feb 2002 trough of $19.09, the next low of $17.85 is still from Jan 2002.
The only redemption for U.S. producers might come from a retreat in Saudi production. As of Sunday, the kingdom seemed set on growing its output by a whopping 30% over the coming weeks to reach a record 12.3 million barrels per day by end-April. It has also rejected overtures by the Trump administration to try and change its mind.
That doesn’t, however, mean that the Saudis and Russians aren’t hurting from the apocalyptic moment in oil now, and their actions contributing to it. Riyadh, which needs oil at $80 for its budget, is looking to slash capital expenditure at state-owned oil giant Saudi Aramco (SE:2222) by as much as 25% from 2019’s $32.8 billion.
Moscow’s own oil giant Rosneft is, meanwhile, selling some assets at home to shore up its finances. Russia is also expected to suffer from a collapse in demand for its Urals, a heavy crude composition of oil produced in Ural, Western Siberia and Povolzhye that is more costly to produce gasoline from than from the lighter Brent.
Such pain could, ultimately, force the two oil producing titans to wield to common sense and go back to cutting some production at least.
“Saudi Arabia will be affected just like the rest of the producers and it is unlikely to reach its target of 10 million bpd of exports, once it has filled its storage tanks in Egypt and Europe,” Jakob of Petromatrix wrote.
“There will be no clear winners. For now, it’s everyone on its own, and supply reductions will happen through prices.”