Is it too soon to dub today Black Monday for oil markets? Crude prices are crashing on the news that Saudi Arabia plans to cut the price of oil it exports and boost its production after Russia refused to coordinate with OPEC on a production cut. Given the decline in oil demand caused by the coronavirus (more on that below), a production cut would seem appropriate. Instead, Saudi Arabia is openly threatening to flood the market. The result has been one of the worst single-day price drops in history.
As I type, benchmark West Texas Intermediate crude is down about 17% on the day, near $34 per barrel. As recently as early January, WTI traded at $63. Since then, the combination of coronavirus-related travel disruptions and the Saudi-Russia price war has absolutely hammered crude. And it’s entirely possible that the worst is yet to come.
We don’t yet know how much extra production the Saudis will provide, or if Russia will cry uncle and agree to production cuts. So there is certain to be tremendous volatility in prices in coming days. But the economic fundamentals for the oil market look bleak. The International Energy Agency is now projecting a drop in worldwide oil consumption this year, something that hasn’t happened since the dark days of the Great Recession in 2009. That forecast, issued today, marks a sharp turnaround from just one month ago, when the IEA was predicting a modest increase in global demand.
I’ll be back soon with additional analysis and forecasts on this fast-moving situation. But I’ll repeat what I wrote a week ago, when WTI was rallying on talk of an OPEC production cut and an anticipated move by the Federal Reserve to slash interest rates: “I think it’s too soon to sound the all-clear for the oil market.” (At the time, my warning that prices could drop to $40 seemed grim. Now it sounds almost quaint.)
WTI fell as low as $26 per barrel in 2016 because of an earlier supply glut. And back then, there was no global pandemic hampering travel. So a price in the mid-$20s now doesn’t strike me as far-fetched. Even if things don’t get that bad, the oil industry is in for serious pain. And drivers can expect gasoline prices, which were already declining, to drop sharply in the next few days.