Saudi Arabia Tanks the Oil Market

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How much lower can oil prices go? Benchmark West Texas Intermediate crude has fallen below $30 per barrel, from a recent high of $63, as global oil demand craters because of coronavirus-related travel shutdowns and disrupted supply chains. Plus Russia and Saudi Arabia, the world’s second- and third-biggest oil producers, are vowing to boost their production after they couldn’t agree on output cuts at a recent OPEC meeting that Russia attended. Traders are reacting to this double dose of bearish news by selling oil futures.

We think WTI could fall to about $25 per barrel in the near term as the bad news continues to rattle markets worldwide. That’s about where crude prices bottomed out in 2016 when the oil market was dealing with a severe supply glut. At about $25, we look for many energy companies to stop drilling new wells in the United States, which would gradually reduce excess supply. But whatever prices end up doing, expect tremendous ups and downs along the way.

Drivers are going to be saving a bundle at the gas pump. The national average price of regular unleaded is down to $2.26 per gallon, from $2.38 a week ago. Before long, the nationwide average will fall below $2 as the drop in oil prices filters through to the retail level. Some states in the South are already seeing gas prices that start with a “1.” That will be commonplace soon.

Natural gas prices had already fallen about as much as they probably could before the big sell-off in oil began. Benchmark gas futures contracts were recently trading at $1.83 per million British thermal units. That’s quite cheap by historical standards, but up a bit from the lows hit a few weeks ago. Ironically, the oil industry’s woes could be good for natural gas prices, because reduced oil drilling also means less gas produced as a by-product of oil wells. So gas output may fall enough to allow gas prices to slowly creep higher this spring.

Stats Source: Department of Energy, Price Statistics