The price of oil has collapsed to levels last witnessed nearly two decades ago as demand plummets across the globe.
West Texas Intermediate crude futures hit a low of $19.85 on Monday and are down over 50% since the beginning of March.
Brent futures have declined nearly 10% , pushing them as low as $22.44 for a year-to-date loss of more than 65%.
Already battered by a massive supply gut, crude oil prices have faced severe pressure from the coronavirus pandemic’s impact on demand. But the worst may be yet to come.
The demand shock coincided with a price war initiated after Saudi Arabia and Russia failed to reach an agreement on supply cuts. The price war started in early March.
With Saudi Arabia boasting the lowest producer prices in the world, the high-cost producers have been severely impacted by the downturn.
Already, the U.S. has tried to shield its shale producers who are staring at unsustainable losses. Just last week, six U.S. senators from oil-producing states implored Secretary of State Mike Pompeo to take action against Saudi Arabia and pressure the Middle Eastern country to reduce supply.
The senators proposed the use of “tariffs and trade restrictions” to achieve their goal of protecting shale producers. Saudi Arabia is yet to cave to the overtures from Washington.
Despite boasting the world’s lowest oil production costs, Saudi Arabia needs higher prices too. Per the International Monetary Fund, the Middle Eastern country needs oil to be priced at slightly over $80 per barrel to balance its budget .
At current prices, which are a quarter of what is needed, Saudi Arabia’s economy and fiscal plans will suffer a heavy blow.
Saudi Arabia has to cave – eventually. The question is: When?
According to commodities analysts like Dan Yergin, the price war won’t end anytime soon. And neither will crude’s historic collapse.
Oil prices may be ranging at lows not seen since 2002, but Yergin expects oil demand to fall by 20 million barrels per day in April as consumption linked to travel and manufacturing declines:
Cars not on the road, airplanes not in the air, factories not working, people not going to work. We see, in this month of April that’s coming, what could be a 20 million barrel a day decline in oil demand.
That’s about 20% of daily global consumption – or the entire daily U.S. consumption – disappearing. Almost overnight.
Barring a sudden supply decrease, that will bludgeon crude prices.
And with global coronavirus cases yet to peak, April may still not be the worst month the oil industry endures this year.