Oil takes worst weekly tumble since 2008 on supply-demand shock

Oil headed for its biggest weekly drop since 2008 as an unprecedented dual supply-demand shock showed no signs of abating.

Futures fell around 2% in New York on Friday as a retaliatory American attack on an Iraqi militia possibly prevented steeper declines. They’re down 25% this week as the coronavirus continues to batter the global economy, with Asian stocks plunging further after the worst session on Wall Street since 1987.

The schism between the former OPEC+ allies appeared to harden as Russian oil producers said they plan to ramp up production next month, while the Kremlin said there are no plans for discussions with Saudi Arabia. The kingdom said earlier in the week that it would boost output by more than 25% in April.

The deluge of new supply coinciding with evaporating demand threatens a major shake-out on the US shale patch and could destabilise the governments of some Opec producers. It’s pushed a gauge of oil volatility to record levels and sent Brent’s market structure into a supercontango, where prompt prices are more than $10 a barrel cheaper than contracts for delivery in 12 months.

“That supply-side shock that we’re seeing is expected to start almost immediately,” Daniel Hynes, senior commodities analyst at Australia & New Zealand Banking Group, said in a Bloomberg TV interview. “The market is still hopeful of some sort of stimulus-led recovery later in the year, so that’s why the back end of the curve is holding up relatively well.”

West Texas Intermediate futures for April delivery fell 1.7% to $30.97 a barrel on the New York Mercantile Exchange as of 11:07 a.m. in Singapore after dropping as much as 3.7% earlier. It closed down 4.5% on Thursday.

Brent crude for May settlement lost 1.6% to $32.69 a barrel on the ICE Futures Europe exchange. They plunged 7.2% on Thursday and have fallen 28% this week. The global benchmark traded at a $1.30 premium to WTI for the same month, near the narrowest since late 2016.

Governments and central banks have so far been powerless to stem the coronavirus-driven rout that’s reverberating through financial markets and threatening a global recession. President Donald Trump has yet to offer a detailed economic rescue package, while the European Central Bank left interest rates unchanged, although it took steps to boost liquidity.

In the US, several independent oil companies have already announced plans to scale back operations amid the flood of cheap crude. The American industry is also encouraging the Trump administration to waive a law that mandates only domestic vessels can be used to transport goods between US ports.

“We are seeing that US shale producers are beginning to cut production, and this may help the supply issue,” said Suvro Sarkar, vice president of group research at DBS Bank.

© 2020 Bloomberg L.P.