Late on Tuesday, WTI plunged as low as $26.20 taking out the lows from the 2015/2016 oil recession, and sending it to a level last seen when US president was George W. Bush, people were listening to Get Busy by Sean Paul and Dogville was one of the most popular movies: May 2003.
While there was no immediately clear catalyst, earlier in the day, Goldman's commodities team published a report in which they discuss the need for commodity prices to drop below cash costs to generate supply curtailments as demand losses across the complex are now unprecedented, as Goldman now believes oil use is down an unprecedented 8 million b/d:
Large commitments from core-OPEC for April/May deliveries pushes the net supply increase near c.3m b/d, which, when combined with the demand losses, results in an April/May surplus of 7mb/d, which will likely breach system capacity during 2Q20.
As Goldman's Jeffrey Currie wrote, "the system strain creates a physical end, even though when COVID-19 will end is unknown, pushing our forecasts to shut-in economics. We now forecast 3m GSCI -25%." As a result of price wars in oil and gas and uncertain policy responses in bulks and base metals, all a direct result of the sharp fall in demand resulting from the COVID-19 containment measures, Goldman has cut its 2Q Brent price target to just $20/bbl from $30/bbl.
But that was not the worst of it for what little is left of oil bulls.
Outdoing not only Goldman, but virtually every single bearish oil analyst in existence, Mizuho’s Paul Sankey not only estimated that Goldman is too optimistic by half, calculating a whopping 15MM b/d in oversupply currently, but that crude prices could go negative - yes, as in you would be paid to take delivery - as Saudi and Russian barrels enter the market.
According to Sankey, much of the US 4MM bpd in crude exports will be curtailed as prices fall and tanker rates soar. And with US storage roughly 50% full, and able to take another 135MM bbl more, assuming a build rate of 2MM b/d, the US can add 14MM bbl/week for 10 weeks until full.
As a result, there is a now race between filling storage and negative pricing "unless U.S. decline rates can outpace inventory builds, which we very much doubt."
Said otherwise, absent dramatic changes, in roughly 3 months, energy merchants will be paying you if you generously take a couple million barrels of crude off their hands.
Which is why despite its low price, oil may still have at least 100% (or more) to drop.