US oil prices plummet to 21-year low as demand dries up
US oil prices have plunged 40 per cent to their lowest level since 1999 as demand dries up and storage facilities struggle to cope with the surplus of oil.
The price of a barrel of West Texas Intermediate (WTI) – the benchmark for US oil – dropped to $11.65 today, amid fears production might have to be halted altogether.
Despite a stronger start, worldwide benchmark Brent crude had also fallen seven per cent by the mid-afternoon, to stand at $26.16.
The oil market has faced increased pressure during the coronavirus pandemic as demand slumps. US storage facilities are also beginning to struggle to cope with the glut of oil, which has weakened prices further.
Earlier this month, Opec and its allies agreed a deal to cut global output by approximately 10 per cent. It represented the largest cut in oil production ever.
Sign up to City PM’s Midday Update newsletter, delivered to your inbox every lunchtime
However, analysts and investors alike are sceptical the huge cuts will be enough to offset the sharp fall in demand amid a coronavirus-induced recession.
Opec members agreed to cut production by 9.7m barrels per day under a fortnight ago. But an estimate from Japanese bank MUFG said oil demand will fall by 19.1m barrels per day in April. And demand will plunge by 12.3m barrels on average in the second quarter.
Oil has further to fall as storage bites
West Texas Intermediate crude in particular was being hit by unusual volatility because the current futures trading contract. The contract governs the trading price for oil, but will expire on Tuesday. That means investors have little interest in buying it.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said the price of WTI could fall even further.
“With little to improve the investor appetite in horizon, the price slump could extend toward the $10 a barrel.”
Craig Erlam, senior markets analyst at Oanda, said the fall shows “just how severe the imbalance is in the oil market right now”. He also pointed to the threat of shrinking storage capacity.
“There has been clear disatisfaction with the Opec+ deal which is why prices are where they are but we’re already seeing evidence of US output shrinking due to market forces and it’s likely to shrink much further,” he added.
“Add to that other measures the US administration is reportedly discussing and the situation could look a little different in a month’s time.”
Weak oil prices sends stocks falling
Global stocks including Wall Street, the FTSE 100 and Asian markets all slumped on today’s oil prices hit.
US stocks dropped this afternoon, with the Dow Jones sinking 1.5 per cent. The S&P 500 also fell 1.2 per cent while the tech-heavy Nasdaq slipped 0.8 per cent.
The FTSE 100 reversed a 1.2 per cent drop to post a marginal gain. But Asian stocks fell back after Japan reported its exports had fallen in March from the year before.
Japan’s Nikkei fell 1.15 per cent while Hong Kong’s Hang Seng was down 0.1 per cent.
“A session that began with tentative gains sank firmly into the red as the day went on,” Connor Campbell, a financial analyst at online betting platform Spreadex, said.
He also pointed to a bad week of data including new US jobless claims and economic readings ahead.
“Tanking oil prices, anxiety over what is almost certain to be a tough data gauntlet… and the deranged behaviour of Donald Trump are all contributing to the toxic tone of Monday’s trading,” he added.