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With oil demand already plummeting due to the economic impact of the coronavirus, traders forecast that prices will drop even further. “The oil market is now faced with two highly uncertain bearish shocks with the clear outcome of a sharp price sell-off,” said Jeffrey Currie, head of commodities research at Goldman Sachs in New York.

Brent for May settlement tumbled as much as US$14.25 a barrel to US$31.02 on the London-based ICE Futures Europe Exchange, the biggest intra-day loss since the U.S.-led bombing of Iraq in January 1991. It pared some of those losses to trade 22 per cent lower at US$35.39 a barrel as of 8:04 a.m. in Singapore.

West Texas Intermediate crude plunged 22 per cent to US$32.22 a barrel after sliding as much as 27 per cent to US$30 a barrel just after the open. Trading was frozen for the first few minutes because of the scale of the loss.

While the price crash was dramatic, for oil specialists the movements in time-spreads, options and volatility are just as remarkable. Brent’s three-month price structure widened sharply as oil for prompt delivery collapsed against later shipments. It moved deeper into contango, a sign of bearishness and oversupply, making it profitable for physical traders to buy crude and put it in storage, either in onshore tank farms or at sea on tankers.

The plunge in oil also ricocheted across financial markets. U.S. equity futures plunged, along with oil currencies including the Norwegian krone and Mexican peso, while havens such as the Japanese yen and gold jumped. Shares of oil producers got hammered, with Australia’s Santos Ltd. and Oil Search Ltd. losing more than 20 per cent in early Sydney trading.

The prospect of another price war is spooking traders who will remember the crash that began in 2014, when an explosion in U.S. shale production prompted OPEC to open the spigots in an attempt to suppress prices and curtail shale output.

That strategy ended in failure, with shale producers proving too resilient and Brent crude tumbling below $30 a barrel in 2016 amid a global glut. It was that crash that prompted OPEC to club together with Russia and others to curtail output and help shore up their oil-dependent economies.

Bloomberg.com