There aren’t enough superlatives to describe how bad things are for the oil market right now. The sudden, rapid spread of coronavirus around the world, and a production surge from Saudi Arabia, have combined to send crude oil prices into a tailspin.

On Monday, prices for West Texas Intermediate (WTI) crude oil, the U.S. benchmark, fell below $20/barrel for the first time in 19 years, as traders grappled with the largest oil glut in modern history while demand wanes with the economic shutdown.

The United States Oil Fund (USO), which tracks oil futures, has fallen 67% year to date, while the Energy Select Sector SPDR Fund (XLE), which holds energy equities, fell by 53% in the same period.



WTI Crude Oil Prices





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Unprecedented Glut

Falling demand and rising supply is never a good recipe for oil, but the current level of oversupply is unheard of. As economies around the world come to a standstill, demand in April may plummet by 15 to 22 million barrels per day, according to a survey of analysts by Bloomberg.

Meanwhile, supply could increase by 2 to 3 million barrels per day—most of it from Saudi Arabia—as the Kingdom follows through on its threat to pump full throttle.

For context, during the worst quarter of the financial crisis 11 years ago, demand fell by 2.5 million barrels per day; and that was while OPEC trimmed output by 4.2 million barrels per day to support the market.

The current situation, where demand is falling by many multiples of what it did during the Great Recession, at the same time that supply is surging, simply has no parallels. In fact, the glut is so great that some analysts are suggesting that all available storage capacity could be filled up, leaving nowhere for excess crude oil to be stored.

If that happens, prices could fall even more precipitously—into the teens, below $10, and even zero are values that have been thrown around.

Indeed, some grades of crude are already trading at once-unimaginable levels. West Canada Select, for example, was trading at $5.08 on Tuesday, while Guernsey Light Sweet traded at $8.48. These landlocked crudes have limited buyers, so they are trading at hefty discounts to WTI.

Shut-Ins Coming

At some point, crude oil prices will get so low that producers will be forced to shut in production. Analysts at Rystad Energy forecast that output will have to be reduced by 3 million to 4 million barrels per day to prevent storage from filling up.

“The current supply/demand gap adds up to a first half 2020 surplus of 1.8 billion barrels. That exceeds the upper end of our estimate of available crude oil storage capacity, which is 1.6 billion. Production is going to have to be reduced or even shut in. It is now a matter of where and by how much,” said Jim Burkhard, vice president and head of oil markets at IHS Markit.



According to IHS Markit, producers will be hesitant to shut in their production for purely economic reasons because there are risks to shutting in production, such as reservoir damage.



Still, if there is nowhere for the oil to go, output will have to be reduced; it’s just a matter of when and how low prices have to go to incentivize that.









Bloomberg reported last week that prices for Wyoming Asphalt Sour had fallen into negative territory, meaning that producers had to pay to get someone to take the oil off their hands.