US oil prices plummeted 9% Tuesday, their worst day since mid-May. Oil dropped to a low of $36.13 a barrel, the weakest level in nearly three months. Brent crude, the world benchmark, fell below $40 a barrel for the first time since late June.
“Demand is down. Supply is up,” said Robert Yawger, director of energy futures at Mizuho Securities. “The economic laws of survival are being violated on both ends of the spectrum.”
“That is a double-blinking warning sign,” said Yawger. “OPEC kind of panicked today by putting out a bad signal to the energy community.”
‘Avalanche of sell orders’
The latest turmoil in the oil market comes during major turbulence in the stock market.
“Oil is getting caught up in the risk-off trade,” said Jeff Wyll, energy analyst at Neuberger Berman. He added that “nothing changed” in the fundamental supply/demand picture for oil to “warrant this kind of drop.”
Just as investors are hitting the exits on tech stocks, they are unwinding speculative bets on crude oil.
“Everyone is trying to get out at once. There is an avalanche of sell orders,” said Mizuho’s Yawger.
Investors are also rushing out of oil stocks.
Weak air travel is depressing demand
The pandemic, along with a price war between Russia and Saudi Arabia, caused oil prices to implode this spring. US oil prices even briefly turned negative for the first time ever, bottoming at -$40 a barrel.
The good news for oil bulls is that demand for gasoline has rebounded sharply.
Road traffic is has nearly recovered and Bank of America expects global oil demand from road use to go positive year-over-year in the next few months. That has helped lift national average gasoline prices to $2.22 a gallon, up from a low of $1.77 in late April.
That’s why Bank of America warned in a report late last week that it will take three years for global oil demand to “normalize.”
“Oil demand globally is really sluggish. All of the low hanging fruit from the global oil recovery has already happened,” said Michael Tran, managing director of global energy strategy at RBC Capital Markets.
When will crude bottom?
Tran warned that the fundamentals in the oil market will likely “continue to be weak through the fall.”
So how much lower can crude go?
Yawger anticipates crude won’t go much lower than $30 a barrel because at that point OPEC would be forced to come to the rescue again.
“I don’t think we’re going into the abyss again like in the spring,” he said.