Oil regains some losses after posting its biggest drop in three decades

Oil clawed back some losses after its biggest drop in three decades as investors grappled with simultaneous supply and demand shocks and the most volatile market on record.

Futures in New York rose about 6 per cent after losing a quarter of their value Monday in the biggest plunge since the 1991 Gulf War. A gauge of volatility in the contract jumped to the highest in data going back to 2007 as the collapse of the OPEC+ alliance set off what could be a long and bitter price war.

Saudi Arabia slashed its official crude pricing over the weekend and is threatening to raise output to record levels, while Russia’s largest producer said it will ramp up production next month. The gush of new supply is happening as the coronavirus pummels global consumption, with the International Energy Agency warning crude demand will drop this year for the first time since the worldwide financial crisis.

Russian Energy Minister Alexander Novak indicated Moscow was prepared for a war of attrition, saying his country’s oil industry had “enough financial resilience to remain competitive at any forecast price level, and to keep its market share.” IEA executive director Fatih Birol warned that “playing Russian roulette in oil markets may well have grave consequences.”

“Saudi Arabia is unleashing a new weapon: cutting oil prices in a world of falling demand,” said Victor Shum, vice president of energy consulting at IHS Markit. However, the Russians may have more staying power given their budget break-even price for crude is about $30 a barrel less than the Saudis, he said.

The unprecedented supply-demand shock poses a serious threat to the U.S. shale boom and oil-dependent economies in the Middle East, Africa and elsewhere. It sent shock waves across global markets, with U.S. stocks plunging, Treasury yields dropping to records and credit markets buckling. Exxon Mobil Corp. dropped the most in 11 years, while Occidental Petroleum Corp. and Chevron Corp. suffering double-digit losses.

West Texas Intermediate crude for April delivery rose 6 per cent to $33 a barrel on the New York Mercantile Exchange as of 11.19am in Singapore after climbing as much as 6.6 percent earlier. It crashed by more than $10 a barrel on Monday to end at $31.13, the lowest since early 2016.

Brent for May settlement advanced 7 per cent to $36.75 a barrel on the London-based ICE Futures Europe exchange after plummeting 24 per cent on Monday. The global crude benchmark traded at a $3.32 a barrel premium to WTI for the same month.

The bounce in oil looks like “nothing more than a slight correction after the huge sell-off yesterday,” said Jeffrey Halley, senior market analyst at OANDA. “Nothing has changed with regards to the structural outlook for oil after the the collapse of the OPEC+ grouping.”

Big banks including Citigroup, Societe Generale and Goldman Sachs Group are warning oil prices could fall further. The IEA said Monday that oil demand is now expected to contract this year by 90,000 barrels a day and, in a rare move, included a more pessimistic scenario in which the demand loss would be many times more severe. In the U.S., the Energy Information Administration said it would delay the release of its monthly Short-Term Energy Outlook to allow time to “incorporate recent global oil market events.”

The shocks in supply and demand have also reverberated across time-spreads and options. Brent for prompt delivery collapsed against later shipments. The structure, known as contango, is a sign of bearishness and oversupply and makes it profitable for physical traders to buy crude and put it into storage, either in onshore tank farms or at sea on tankers.