WTI, Brent Sink Over 23%

WASHINGTON (DTN) -- Oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange suffered their biggest daily rout in more than a decade on Monday, hit by an erupting price war between Saudi Arabia and Russia that threatens to flood the global market with supplies at a time when demand growth is projected to post the full-year drop as a result of the rapid spread of coronavirus.

International Energy Agency released its latest monthly oil market outlook on Monday, projecting the first annualized decline in global oil consumption rate since financial crisis of 2009. The Paris-based agency revised lower its estimates for global demand growth by a staggering 1.1 million barrels per day (bpd) from its previous forecast released a month ago, calling for world's oil consumption to fall by 90,000 bpd in 2020.

"In the past few weeks, Covid-19 (coronavirus) has gone from being a Chinese health crisis to a global health emergency. The immediate outlook for the oil market will ultimately depend on how quickly governments move to contain the coronavirus outbreak, how successful their efforts are, and what lingering impact the global health crisis has on economic activity," said IEA.

As investors braced for economic fall-out from the spreading virus, global financial markets took a historic beating on Monday. The Dow Jones Industrial plunged over 2,000 points or 7% at the market's open, triggering the so called "circuit breakers" -- measures that authorize New York Stock Exchange to temporally close its platforms. After NYSE re-opened, stock indexes managed to only briefly recover some of the earlier losses, with DJI ending the volatile trade day down 1,918 points and S&P 500 falling 7.5%.

At settlement, nearby delivery month West Texas Intermediate futures dropped $10.15 to $31.13 barrel (bbl) and the May Brent contract plunged $10.91 for a $34.36 bbl. NYMEX April RBOB futures plunged 25.21 cents to $1.1369 gallon and NYMEX April ULSD futures sank 22.23 cents to a multiyear low $1.1629 gallon.

The combination of unchecked production and weakening demand growth has sent benchmark WTI crude futures down 25.1% on Monday -- the worst daily drop since the Gulf War of 1991. Crude futures are now nearly 60% below the January peak and the price outlook doesn't stir hopes for a meaningful recovery any time soon.

Investment banks such as Goldman Sachs and Citi on Monday downgraded their oil price forecast to $30 bbl for the first quarter 2020 as a result of the coronavirus impact and price war between the world's two largest oil producers, Saudi Arabia and Russia.

After the breakdown of OPEC+ talks on Friday (March 6), both countries opted for increase in production next month while undercutting each other's prices in their battle for a global market share.

Saudi Arabia on Saturday (March 7) announced it would cut its official selling price for all of its crude grades for all destinations by at least 15%, while also planning to hike output to more than 10 million bpd, starting in April.

Meanwhile, Russia's oil minister Alexander Novak said Monday the plunge in oil prices would not affect the country's oil sector.

"The Russian oil industry has a high-quality resource base and a sufficient margin of financial strength to remain competitive at any forecast price level, as well as maintain its market share," Novak was quoted as saying on the Russian government's official website.

The stunning turn of events followed the disintegration of a three-year pact between the world's two largest oil producers that spurred predictable investment climate for many of the new oil projects, including U.S. shale oil. Some analysts now believe that U.S. tight oil will become "the biggest victim" from Saudi-Russian fall-out.

Liubov Georges can be reached at liubov.georges@dtn.com

(BAS)

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