By Stephanie Kelly
NEW YORK (Reuters) - Oil prices fell below $30 a barrel on Monday as the worldwide coronavirus outbreak worsened over the weekend, leading governments and businesses to shut down as the global economy appeared to be headed toward certain recession.
At the same time, Saudi Arabia reiterated its plans to boost production in response to a developing price war with its rival Russia after efforts to restrict supply failed earlier this month. The coming flood of supply could result in the largest surplus of crude in history, analysts said.
Brent crude (LCOc1) was down $3.35, or 9.9%, to $30.50 a barrel by 12:10 p.m. EDT (1610 GMT). The international benchmark earlier fell to $29.52 a barrel, its lowest since January 2016.
U.S. West Texas Intermediate (WTI) crude (CLc1) fell $2.08, or 6.6%, to $29.65 a barrel.
The coronavirus outbreak, which has infected at least 174,000 people and killed around 6,700, already has caused oil prices to plummet by 50% since the start of the year. Many forecasters have adjusted down estimates on demand for crude, as the virus disrupts business activity, travel and daily life.
With Saudi Arabia and Russia pledging to boost production, IHS Markit estimates that the oversupply could come to 800 million to 1.3 billion barrels of oil - two to three times what existed in late 2015 to early 2016, when the Organization of the Petroleum Exporting Countries opened the taps to hamstring the U.S. shale industry.
“The last time that there was a global surplus of this magnitude was never. Prior to this, the largest six-month global surplus this century was 360 million barrels. What is coming will be twice that or more,” said Jim Burkhard, vice president and head of oil markets at IHS Markit.
Earlier this month OPEC and Russia failed to extend production cuts that began in January 2017, aimed at supporting prices and lowering stockpiles.
An OPEC and non-OPEC technical meeting planned for Wednesday in Vienna has been called off as attempts to mediate between Saudi Arabia and Russia after the collapse of their supply cut pact made no progress, sources said.
Saudi Aramco (SE:2222) is likely to sustain higher oil output planned for April in May, Chief Executive Amin Nasser said, signaling the top oil-producing company is prepared to live with low oil prices for a while.
CENTRAL BANK ACTION
Central banks globally took action over the weekend to quell the economic fallout of the pandemic, but the measures did little to strengthen stock markets in freefall, as investors anticipate a sharp contraction in demand in coming weeks anyway.
The U.S. Federal Reserve on Sunday slashed its key rate to near zero, triggering an unscheduled rate cut by the Reserve Bank of New Zealand to a record low as markets in Asia opened for trading this week.
The Bank of Japan later stepped in by easing monetary policy further, while Gulf central banks also cut interest rates.
"The price response is understandable, given that lower interest rates and new bond purchasing programmes will do nothing to combat the current weakness of oil demand," Commerzbank (DE:CBKG) analyst Carsten Fritsch said.
In China, where the virus began, daily refinery throughputs dropped 4.8% in the first two months of the year, sliding to the lowest level since December 2018, data from the National Bureau of Statistics showed on Monday.
Brent's premium to WTI
(Graphic: Brent's premium to WTI png, https://fingfx.thomsonreuters.com/gfx/editorcharts/GLOBAL-OIL/0H001R8GQCCQ/eikon.png)
Numerous U.S. oil companies have swiftly cut back spending, with analysts anticipating consolidation or restructurings as a result of the supply shock. U.S. crude output has grown in recent years to nearly 13 million bpd, making it the world's largest producer.
"Some of them (U.S. shale oil companies) may not survive prolonged low oil prices, and in this event U.S. production would decrease. Less crude availability in the U.S. is likely to reduce the WTI discount to Brent," Societe Generale (PA:SOGN) analysts in a note to clients.
U.S. President Donald Trump said on Friday that the United States would take advantage of low oil prices and fill the nation's emergency crude oil reserve. The move is aimed to help energy producers struggling from the price plunge.
The United States could begin purchasing domestically produced crude oil for the Strategic Petroleum Reserve as soon as two weeks from now, and fill it in several months, an Energy Department source said on Monday. However, the purchases are not seen as likely to offset the drop in demand nor the increase in supply, Energy Aspects said in a note.