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Oil in Grips of Chaos After Price War Triggers Historic Crash

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March 9, 2020
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By R Rusak / Shutterstock

By James Thornhill (Bloomberg) — Oil clawed back some of its biggest drop in a generation as a battle for market share between Saudi Arabia and Russia threatens to boost supply just as the coronavirus spurs the first decline in demand since 2009.

Futures in New York were up 2.1% on Tuesday, after losing 3% shortly after trading resumed in Asia. The market plunged 25% on Monday — the biggest price drop since the 1991 Gulf War.

Saudi Arabia slashed its official crude pricing and is threatening record output while Russia’s largest producer said it will ramp up production next month. This is happening at a time when demand is being drastically eroded by the virus impact, with the International Energy Agency now expecting global oil consumption to contract by 90,000 barrels a day this year.

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.” Meanwhile the IEA’s Executive Director Fatih Birol warned that “playing Russian roulette in oil markets may well have grave consequences.”

The oil crash sent shockwaves across markets, with U.S. stocks going through one of the biggest sell-offs since the financial crisis, Treasury yields plummeting, and credit markets buckling. Stocks of energy producers were dragged down, with Exxon Mobil Corp. dropping the most in 11 years and Occidental Petroleum Corp. and Chevron Corp. suffering double-digit losses.

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.”

West Texas Intermediate crude for April delivery rose 71 cents to $31.84 a barrel on the New York Mercantile Exchange at 10:20 a.m. Sydney time after dropping more than $10 a barrel on Monday to end at $31.13 a barrel. Brent for May settlement fell 24% to end Monday at $34.36 on the London-based ICE Futures Europe exchange.

The shocks in supply and demand have also reverberated across time-spreads, options and volatility. Brent’s three-month price structure widened sharply as oil for prompt delivery collapsed against later shipments.

It moved deeper into contango, a sign of bearishness and oversupply, making it profitable for physical traders to buy crude and put it into storage, either in onshore tank farms or at sea on tankers.

© 2019 Bloomberg L.P
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