US oil prices fell 9% on Tuesday, their worst day since mid-May. Oil fell to a low of $ 36.13 a barrel, the lowest level in nearly three months. Brent, the world benchmark, fell below $ 40 a barrel for the first time since late June.
“Demand is down. The supply is up, ”said Robert Yawger, director of energy futures at Mizuho Securities. “The economic laws of survival are violated on both ends of the spectrum. ”
The sale came after Saudi Arabia, the de facto leader of OPEC, slashed its official sale price to Asia and the United States, Bloomberg News reported. It’s never a good sign that the world’s largest oil exporter feels pressured to lower prices to attract buyers.
‘Avalanche of sell orders’
The latest turmoil in the oil market comes during major turmoil in the stock market.
The Nasdaq plunged Tuesday for the third day in a row and is flirting with a 10% correction from records. The big winners of the pandemic like Tesla (, )Apple ( and )Zoom ( are falling a lot more. )
“Oil is traded safely,” said Jeff Wyll, energy analyst at Neuberger Berman. He added that “nothing has changed” in the basic picture of oil supply and demand to “justify this kind of decline”.
Just as investors exit tech stocks, they unwind speculative bets on crude oil.
“Everyone is trying to get out immediately. There is an avalanche of sell orders, ”said Yawger of Mizuho.
Investors are also rushing out of oil stocks.
Apache (, )Occidental Petroleum ( and )Diamondback Energy ( all fell more than 6% on Tuesday. )ExxonMobil (, which was kicked out last month from the Dow Jones, fell 3%. )
Weak air travel drives down demand
The pandemic, accompanied by a price war between Russia and Saudi Arabia, imploded oil prices this spring. Oil prices in the United States even briefly turned negative for the first time, reaching -40 $ a barrel.
But unprecedented production cuts by OPEC and Russia helped spark a V-shaped recovery in the energy market. Barely seven weeks after the bottom of the wave, US crude fell back to $ 40 a barrel. This led OPEC and Russia to agree to slowly increase production from very low levels.
The good news for the oil bulls is that demand for gasoline has rebounded strongly.
Road traffic has almost resumed and Bank of America expects global demand for oil from road use to turn positive year over year in the coming months. This helped push national average gasoline prices to $ 2.22 per gallon, from $ 1.77 at the end of April.
The bad news is that air travel is nowhere near pre-COVID levels – and that is keeping demand for jet fuel very depressed. As the CNN Business Recovery Tracker shows, only 940,000 people were processed through TSA security lines on Monday, down 59% from a year ago.
Business travel is unlikely to recover until there is widespread access to a coronavirus vaccine, United Airlines ( President Oscar Munoz recently told CNN Business. )
That is why Bank of America warned in a report late last week that it will take three years for global oil demand to “normalize”.
“Global demand for oil is really sluggish. All the ready fruits of the global oil recovery have already arrived, ”said Michael Tran, managing director of global energy strategy at RBC Capital Markets.
When is the raw background?
Tran warned that oil market fundamentals “will likely continue to be weak during the fall.”
So how much can crude decrease?
Even at Tuesday’s lows, U.S. oil prices are still trading around $ 75 above the negative April 20 prices. But energy analysts don’t expect this sub-zero journey to repeat, maybe never again.
Yawger predicts that crude will not drop much lower than $ 30 a barrel because by then OPEC would be forced to come to the rescue again.
“I don’t think we are going back into the abyss like spring,” he said.