As crude oil continues to slump, charting fresh lows below $20 a barrel Monday, oil traders across the globe are scrambling to sell as rapidly vanishing demand drives key physical crude prices to multi-decade lows, with some U.S. oil even valued at near $10 a barrel.
The crude market is trapped between a collapse in demand as a result of the coronavirus pandemic and a price war between Saudi Arabia and Russia, which are causing a deluge of oil.
Major crude operators like India’s IOC have declared force majeure on crude purchases, as they struggle with the sudden stoppage in demand. Key benchmarks in Canada and Mexico traded at less than $10 per barrel on Monday, less than the cost of production. “Force majeure” translates literally as “superior strength,” and describes unforeseen disasters including anything from natural disasters like hurricanes or avalanches, to manmade emergencies like labor strikes or wars.
Climbing Oil Futures
Oil futures climbed higher overnight Monday and to start trading on Tuesday, with the hope that potential negotiations between the U.S. and Russia would end the oil-price war. But the weakness in physical markets shows market participants concentrating on the avalanche of coming supply running into a worldwide collapse in demand, which has driven WTI oil back towards $20 a barrel after a run-up as high as $21.89 on Tuesday.
“The gap between physical assessments and futures reflects the differences between the realities on the ground and speculations about efforts to ease that pressure going forward,” JBC Energy consultants wrote Tuesday.
Saudi Arabia is set to release its official selling prices by next week, which could increase pressure on traders to dump long-term supplies hastily.
Crude oil has continued its barreling downdraft as Saudi Arabia is not backing down from the oil price war with Russia for market share, threatening another increase in its crude oil exports beginning in May, despite a growing global glut amid crashing demand.
“[T]he Kingdom intends to increase its crude oil exports, starting from May, by about 600 thousand barrels per day, bringing the total of Saudi petroleum exports to 10.6 million barrels per day,” an official at the Saudi Arabian Energy Ministry said on Monday, as carried by the official Saudi Press Agency.
“This increase came as a result of displacing crude with natural gas from the Al-Fadhili gas plant, as a fuel for generating electricity, and from the decrease in local demand for petroleum products due to the decrease in transportation from the precautionary measures in place to limit the coronavirus outbreak,” said Saudi Arabia, OPEC’s top producer, and the world’s top oil exporter, which continues to signal an aggressive supply surge amid profoundly depressed global demand.
For ETF investors who are using short oil ETFs to play the downdraft. The ProShares UltraShort Bloomberg Crude Oil (SCO) and the VelocityShares 3x Inverse Crude ETN (DWTI) were up more than 12% and 17% respectively Monday, as bearish oil investors capitalized on the downtrend.
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