SINGAPORE (BLOOMBERG, REUTERS) - Oil clawed back some losses on Tuesday (March 10) after its biggest drop in three decades as investors grappled with simultaneous supply and demand shocks and the most volatile market on record.
Futures in New York rose about 6 per cent after losing a quarter of their value on Monday in the biggest plunge since the 1991 Gulf War. A gauge of volatility in the contract jumped to the highest in data going back to 2007 as the collapse of the Opec+ alliance set off what could be a long and bitter price war.
Saudi Arabia slashed its official crude pricing over the weekend and is threatening to raise output to record levels, while Russia's largest producer said it will ramp up production next month. The gush of new supply is happening as the coronavirus pummels global consumption, with the International Energy Agency warning crude demand will drop this year for the first time since the worldwide financial crisis.
Russian Energy Minister Alexander Novak indicated Moscow was prepared for a war of attrition, saying his country's oil industry had "enough financial resilience to remain competitive at any forecast price level, and to keep its market share." IEA executive director Fatih Birol warned that "playing Russian roulette in oil markets may well have grave consequences."
"Saudi Arabia is unleashing a new weapon: cutting oil prices in a world of falling demand," said Victor Shum, vice president of energy consulting at IHS Markit. However, the Russians may have more staying power given their budget break-even price for crude is about US$30 a barrel less than the Saudis, he said.
The unprecedented supply-demand shock poses a serious threat to the US shale boom and oil-dependent economies in the Middle East, Africa and elsewhere. It sent shock waves across global markets, with US stocks plunging, Treasury yields dropping to records and credit markets buckling. Exxon Mobil dropped the most in 11 years, while Occidental Petroleum and Chevron suffering double-digit losses.
West Texas Intermediate crude for April delivery rose 6 per cent to US$33.00 a barrel on the New York Mercantile Exchange as of 11:19 a.m. in Singapore after climbing as much as 6.6 per cent earlier. It crashed by more than US$10 a barrel on Monday to end at US$31.13, the lowest since early 2016.
Brent for May settlement advanced 7 per cent to US$36.75 a barrel on the London-based ICE Futures Europe exchange after plummeting 24 per cent on Monday. The global crude benchmark traded at a US$3.32 a barrel premium to WTI for the same month.
The bounce in oil looks like "nothing more than a slight correction after the huge sell-off yesterday," said Jeffrey Halley, senior market analyst at OANDA. "Nothing has changed with regards to the structural outlook for oil after the the collapse of the Opec+ grouping."
Big banks including Citigroup, Societe Generale and Goldman Sachs are warning oil prices could fall further. The IEA said Monday that oil demand is now expected to contract this year by 90,000 barrels a day and, in a rare move, included a more pessimistic scenario in which the demand loss would be many times more severe. In the US, the Energy Information Administration said it would delay the release of its monthly Short-Term Energy Outlook to allow time to "incorporate recent global oil market events."
The shocks in supply and demand have also reverberated across time-spreads and options. Brent for prompt delivery collapsed against later shipments. The structure, known as contango, is a sign of bearishness and oversupply and makes it profitable for physical traders to buy crude and put it into storage, either in onshore tank farms or at sea on tankers.
The Trump administration, meanwhile, urged Russia's ambassador to the United States to consider the importance of calming the markets.
"These attempts by state actors to manipulate and shock oil markets reinforce the importance of the role of the United States as a reliable energy supplier to partners and allies around the world," US Energy Department spokeswoman Shaylyn Hynes said in a statement on Monday.
The department did not name any country, but said it was watching the fallout from last week's meeting in which a three-year pact between Russia and Saudi Arabia, the top producer in the Organization of the Petroleum Exporting Countries, collapsed after Russia declined to follow Opec's lead in cutting output.
US Treasury Secretary Steven Mnuchin "emphasized the importance of orderly energy markets" in a previously scheduled meeting on Monday with Russian Ambassador Anatoly Antonov, the Treasury said in a statement.
Mnuchin's pleas could face an obstacle after the Trump administration last month slapped sanctions on a subsidiary of Russian state oil major Rosneft that it says provides a lifeline to Venezuela's President Nicolas Maduro. The US and most other Western countries consider Maduro's 2018 election a sham.
But Russia, which has boosted operations in Venezuela as the country faces an economic crisis, believes it is unfair to penalize Russian companies without also placing sanctions on US companies that have operations in the South American country, including Chevron.
The market rout poses a threat to the bustling US drilling industry, an important segment of the US economy that has made the country into the world's largest producer of oil and gas and reversed its historic role as a proponent of low energy prices.
The plunge could push many US producers, some of whom have already been hit by near-record low natural gas prices, into bankruptcy.
The oil and gas industry downplayed the effect of the oil price drop on US producers, however.
Mike Sommers, the head of the American Petroleum Institute industry group, said efficiency advances brought about during the US shale revolution are protecting American drillers from gyrations in global oil markets.
Sommers acknowledged that producers cannot be entirely shielded from global market forces, however.
President Donald Trump, who is seeking reelection in November, tried to put a silver lining on the oil price drop.
"Good for the consumer, gasoline prices coming down!" he wrote.