The oil market is once again plunging as demand fears ripple through space. On September 8, US oil prices lost 7% to trade at $36.76 a barrel. That was crude’s worst day which was also the lowest closing price in almost three months. At some point, oil was down by 9%.
Brent crude which is the world benchmark for oil fell below $40 per barrel for the first time since late June. The massive selling in the energy market comes mainly due to the rising concern about how much crude the fragile global economy requires. Labor Day is long gone just like summer driving season in the United States is over.
Jet fuel demand is quite weak since many people are avoiding flights in this global pandemic. Nobody knows for sure how long it might take to recover. The director of energy futures at Mizuho Securities, Robert Yawger, said:
“Demand is down. Supply is up. The economic laws of survival are being violated on both ends of the spectrum.”
The latest selloff comes after Saudi Arabia who is the de facto leader of OPEC cut its official selling price to the US and Asia as reported by Bloomberg News. It is never a good sign when the biggest oil exporter in the world feels compelled to cut prices aiming to attract buyers. Yawger commented:
“That is a double-blinking warning sign. OPEC kind of panicked today by putting out a bad signal to the energy community.”
Massive Sell Orders
This turmoil in the oil market comes at a time when major turbulence has affected the stock market. The Nasdaq plunged on September 8 for the third consecutive day and it is hovering around a 10% correction from record highs. Major pandemic winners like Zoom (ZM), Apple (AAPL), and Tesla (TSLA) are down much more.
Jeff Wyll, an energy analyst at Neuberger Berman said that oil is getting caught up in the risk-off trade. He believes that nothing changed in the basic supply/demand picture for oil to warrant that kind of drop. As investors are exiting the tech stocks, they are unwinding speculative bets on crude oil. Mizuho’s Yawger commented:
“Everyone is trying to get out at once. There is an avalanche of sell orders.”
Notably, investors are also rushing away from oil stocks. Occidental Petroleum (OXY), Apache (APA), and Diamondback Energy (FANG) all lost over 6% on September 8. ExxonMobil (XOM) lost another 3% after it was kicked out of the Dow in August.
Weak Air Travel Killing Demand
The pandemic coupled with a price war between Saudi Arabia and Russia made oil prices to implode earlier this year. The United States oil prices even briefly dropped to the negative zone for the first time and bottled at -$40 per barrel.
However, the unexpected production cuts from Russia and OPEC helped trigger a V-shaped recovery in the energy market. Around 7 weeks after bottoming, US crude returned to $40 per barrel. These market dynamics made OPEC and Russia agree to slowly increase production from significantly low levels.
On the bright side, the oil bulls may return as demand for gasoline rebounds steeply. Road traffic is recovering and Bank of America expects that global oil demand from the roads will turn positive year-over-year in the coming few months. That positivity has lifted the national average gasoline prices to $2.22 a gallon which is up from a bottom of $1.77in late April
The bad news is that air travel is yet to recover to the pre-COVID levels. That has kept the demand for jet fuel very depressed. Around 940,000 people were processed via TSA security lines on September 7, down 59% from a year ago.
There is a possibility that business travel will not recover until a coronavirus vaccine is made available to the general public, according to United Airlines (UAL) Chairman Oscar Munoz.
That is the reason why Bank of America warned in a report late last week that it will take up to three years for global oil demand to ‘normalize.’ Michael Tran, managing director of global energy strategy at RBC Capital Markets, said:
“Oil demand globally is sluggish. All of the low hanging fruit from the global oil recovery has already happened.”
When Will Crude Oil Bottom?
Tran warned that the fundamentals in the crude oil market will probably continue to be weak throughout the fall. How much lower can oil go? Even at the September 8 lows, the US oil prices are still trading at around $75 above the lows hit on April 20. However, energy analysts do not expect a repeat of that trip down below zero ever again.
Yawger expects that crude will not go much lower than $30 per barrel since at that point OPEC would have to come to the rescue once more. He said:
“I don’t think we’re going into the abyss again like in the spring.”