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Crude oil has slumped to its lowest since 2016 as coronavirus continues to weigh on global demand amid a price war between OPEC and its allies that's boosting supply.
International benchmark Brent crude tumbled as much as 10% to $30.49 a barrel as of 8:00 a.m. in New York. West Texas Intermediate fell as much as 8.13% to $29.15 per barrel at the same time.
Demand for jet fuel, gasoline, and diesel has slumped amid the coronavirus pandemic as airlines cancel flights, cruise lines shutter operations, and consumers are told to practice social distancing. Outlooks for oil demand have cratered, while a global price war between OPEC and its allies threatens to push supply to never-before-seen levels, according to IHS Markit, Bloomberg reported.
If the global price war between Russia and Saudi Arabia continues while the world slips into a recession amid the coronavirus pandemic, the oil glut could grow to between 800 million and 1.3 billion barrels in the first six months of this year, IHS said in the note.
"The last time that there was a global surplus of this magnitude was never," Jim Burkhard, vice president and head of oil markets at IHS Markit, told Bloomberg. "Prior to this the largest six-month global surplus this century was 360 million barrels. What is coming will be twice that or more."
IHS Markit says that the main reason for the surplus oil is the sharp and sudden drop in demand brought on by the coronavirus pandemic, while Saudi Arabia's announcement that it would increase crude supply by 2.6 million barrels per day weighed on prices. Russia also said that it could increase crude output by as many as 300,000 to 500,000 barrels per day.
The US oil industry could be one of the hardest hit by the glut of supply, according to the note. Output in the US could drop by as much as 2 million to 4 million barrels per day for the next year and a half.
That could lead highly indebted US shale companies to default, according to JPMorgan. The firm expects cumulative high-yield energy default rates of 24%, mostly in 2021, assuming that crude rises to $40 per barrel in the second half of 2020 and gains to $50 per barrel the next year. That rate could be higher and reach as much as 59% if crude oil prices stay near $40 per barrel through 2022.
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