The benchmark US crude West Texas Intermediate (WTI) collapsed to just below $11 on Monday, its worst drop since December 1998, as the coronavirus outbreak causes demand to slump.
“Over the past few months, the story defining oil’s painful depreciation revolved around the coronavirus chaos, demand destruction and oversupply concerns,” explained Lukman Otunuga, Research Analyst at FXTM.
Rising fears over fuel storage facilities being overwhelmed by the excessive supply are compounding to oil’s woes and offered investors another reason to attack the already battered commodity, Otunuga said.
“With economic growth in the world’s largest energy consumer decelerating, the grim outlook for oil is growing grimmer by the day. At this point in time, it is difficult to pinpoint a possible floor for WTI crude and this continues to be reflected in the bearish price action.”
WTI crude depreciated 7% on Monday and more than 80% since the start of 2020. Prices are heavily bearish on the daily timeframe with the technical and fundamentals well aligned.
On the technical analysis, FXTM’s research analyst said, “sustained weakness below $15 could open the doors towards $10 and potentially lower. Alternatively, a break above $15 may trigger a technical rebound back towards $29 before bears re-enter the scene.!
Earlier on Monday, FXTM’s market analyst Han Tan, attributed the drop in crude oil prices due to the glut in global supplies.
“The futures market is faring even worse, with contracts for physical crude Oil that’s to be delivered in May falling to a 21-year low, having plummeted by over 15%,” he said.
“Brent spot also began the new trading week on the back foot but is faring slightly better than its US counterpart. Still, Brent is struggling to keep its head above the $30/bbl psychological level for long, despite the OPEC+ pledge to lower production levels by 9.7 million barrels per day starting next month,” Han Tan said.
Covid-19 has caused global demand to shrivel up, leaving US producers with excess supplies but with dwindling space to store physical crude. Given the shutdown to the US economy, oil inventories in the United States could hit a new record high in May, exceeding the previous record of 1.374 billion barrels that was recorded in August/September 2016.
This has prompted some physical crude Oil to be sold for as low as $2/bbl. If the situation deteriorates further, producers may have to actually pay customers to take the Oil, as was the case with Wyoming Asphalt Sour in mid-March when a barrel was sold for negative 19 cents, the FXTM analysts said.
“Oil is clearly in dire straits, and is at the mercy of the coronavirus. Until the outbreak has peaked and the global economy can begin its journey towards a recovery, Oil prices are expected to remain lethargic as supply-side intervention is deemed inadequate in offsetting the demand-side’s downside risks,” Han Tan concluded.