Investors may heave a sigh of relief when this wild week finally comes to a close. Yesterday, the Dow Jones Industrial average plunged 10%, its biggest one-day percentage loss since 1987. Oil traders might not be impressed, given that West Texas Intermediate crude futures fell roughly 25% on Monday alone, with additional big drops over the course of the week.
It’s amazing to think that, just two months ago, WTI was trading at about $63 per barrel. It fell into the $50s as the coronavirus starting to crimp oil demand in China; the $40s when the disease started hampering travel in other countries; and the $30s after OPEC and Russia failed to agree on an oil production cut, which led Saudi Arabia to announce that it was going to flood the market with cheap crude. Russia, unfazed, announced that its economy could withstand years of low prices. The Saudis then threatened additional production hikes.
So how much more pain can oil producers expect? It’s not often that I get a chance to quote the Fourth Century chronicler Bishop Ambrose of Milan, but this occasion feels apt. Writing about the plague of barbarian invaders who were in the process of bringing about the end of the Roman Empire, the Bishop wrote: “The Huns fell upon the Alans, the Alans upon the Goths and Taifali, the Goths and Taifali upon the Romans, and this is not yet the end.”
“This is not yet the end” is how I see the situation for the beleaguered oil market. WTI currently trades near $32 per barrel. Maybe that’s the bottom, but do you really think the worst of the coronavirus health scare is over? Or that the economic impacts have been fully felt yet? I wouldn’t bet on it.
After all, WTI traded as low as $26 per barrel in 2016, a time when there was no global pandemic and no looming recession, and no oil price war between Russia and Saudi Arabia.
Whatever happens next with oil prices is largely in the hands of Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman, the Kingdom’s de facto ruler, says Stephen Schork, editor of the Schork Report energy investing newsletter. He believes Russia refused to cut output because of U.S. sanctions imposed on its oil industry last year, which ate into the country’s share of the global oil market while U.S. producers filled the gap. Perhaps Russia decided that it had nothing to gain from further production cuts that would only boost oil prices for its rivals in Texas and North Dakota. And then perhaps the Saudi crown prince mistakenly believed he could bully Moscow into cooperating anyway, a miscalculation that led to the present price war.
How negotiations between the Saudis and the Russians play out from here is anybody’s guess. But what’s certain is that oil demand is going to continue to suffer as the coronavirus limits air travel and disrupts freight shipping. In the U.S. alone, jet fuel consumption is down 5% so far this year compared with the same period a year ago, according to Energy Department data. Meanwhile, U.S. oil output remains near a record high, and the next two biggest producers, Russia and Saudi Arabia, are vowing production hikes.
Another certainty: Drivers in the U.S. are going to be paying less at the pump. The national average price of regular unleaded stands at $2.30 per gallon according to AAA. That’s off 13 cents from a month ago. Later this spring, the national average is likely to slip below $2: A nice savings for all the folks taking road trips instead of flying.