Oil Market Outlook

Oil prices last week posted their biggest weekly plunge since 2008, capping a dramatic week as major producers prepared to flood the market with supply just as the coronavirus crushes demand.

But prices jumped late on Friday, after President Donald Trump said the United States would use emergency funds to buy up oil to refill the country’s Strategic Petroleum Reserve.

Replenishing the SPR at an attractively low cost would enable the government to take as much as 77 million barrels off an oversupplied world market, energy analysts said.

Still, losses for the week were in double digits after the collapse of talks between members of the Opec+ group the week before. Brent crude was trading on Friday at $34.71 a barrel, compared with $45.27 a week earlier. West Texas Intermediate futures were down $8.35 on the week to $32.93.

Instead of reaching a deal on March 6 to cut output to mitigate the fallout from the virus, producers led by Saudi Arabia and Russia embarked on a war for market share and pledged to pump more.

Crude was already under pressure, with investors uncertain if efforts by policymakers worldwide would be enough to tackle the economic impact of the coronavirus. Oil’s collapse is also hitting US shale producers by forcing them to cut spending and dividends.

The gloomy outlook for global oil demand darkened as Mr Trump declared a national emergency in the US and Europe became the focus of the outbreak. In one of the most bearish forecasts, Trafigura Group estimates that global oil demand could contract by as much as 10 million barrels per day, or roughly 10%.

Opec, meanwhile, believes there will still be some demand growth, but only 60,000 bpd. That’s down dramatically from the group’s earlier forecast for growth of 980,000 bpd this year. And the US Energy Information Administration said American oil output would fall next year for the first time since 2016, as drillers cut back on capital spending in the face of uncertain returns.

In any case, the oil-price war between Saudi Arabia and Russia is set to unleash the biggest flood of crude ever seen, perhaps more than the world can store.

As producers ramp up shipments in a battle for market dominance, and the virus hammers demand, more than a billion extra barrels could flow into storage tanks. That could strain available space and send oil prices crashing further, with brutal consequences.

“I don’t see how you don’t exhaust global storage capacity, if this goes on until summer at the production numbers being talked about,” said Jeffrey Currie, global head of commodities research at Goldman Sachs.

The looming glut may still be held in check if the US SPR purchases are ambitious enough. As well, producers might need months to fully activate the idle assets they need to flood the market. And as low crude prices batter the Saudi and Russian economies, a “truce” will probably be reached, according to Ed Morse, head of commodities research at Citigroup.

But if hostilities continue, the tide of oil is likely to become a tsunami.